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TheStreet Open House

ETFs in the BRICs May No Longer Do the Trick

NEW YORK (TheStreet) --The emerging-markets theme has taken a beating in the last couple years and the losses have intensified in the new year. The iShares MSCI Emerging Markets ETF (EEM) was down 5% in 2013; so far in 2014 it has dropped almost 8%.

All investment themes go through stages where in the beginning just about everything goes up for the newness or perceived newness of the investment idea, then the concept matures requiring more and more selectivity in choosing the best way to capture the evolution of that theme.

Ten years ago emerging markets, most notably the so called BRIC markets of Brazil, Russia, India and China, required very little analysis. In a five-year period ending in June 2008 the iShares MSCI Brazil ETF (EWZ) went up 818%, according to Google Finance. In that same period the Templeton Russia & East European Fund (TRF) was up 172%, the India Fund (IFN) was up 304% and the China Investment Fund (CHN) was up 125%. TRF, IFN and CHN are closed-end funds. There were no exchange-traded funds tracking these countries in the time studied.

In the last five-year period those four funds have struggled. Emerging markets have, in general, done poorly; for instance, EEM is down over 20% in the last three years.

Where selectivity now is paramount to success in developing market investing, it makes sense to look at parts of the theme that are less mature -- i.e., where the BRICs were 10 years ago -- as well as segments where money is being spent and demographic trends.

So-called frontier markets capture the less-mature investment destination idea. Part of the reason for the early success of investing in the BRIC courtries was that, coming off of the Internet stock craze, the BRICs were  under-invested.

Today, there are over 100 ETFs that are either devoted to BRICs or are BRIC-centric, with assets greater than $100 billion, according to ETF.com. This compares to nine frontier market ETFs totaling just under $1 billion.

Of these, the iShares MSCI Frontier 100 ETF (FM) is the largest fund in the space, at $500 million. It tilts heavily to the Middle East with a combined 54% to Kuwait, Qatar and the United Arab Emirates. Like many developing market funds, financials are the largest sector of the fund at 53%.

The other large fund in the frontier space is the Market Vectors Vietnam ETF (VNM), with $400 million. Recently, however, Barron's reported that VNM is running into complications with ownership restrictions that limit foreign control of Vietnamese companies to 49%.

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