For the first time in a while investors have some new choices for emerging-market ETFs. Last Friday
launched six ETFs as part of the SPDR product line:
- SPDR S&P China (GXC) - Get Report
- SPDR S&P Emerging Europe (GUR)
- SPDR S&P Latin America (GML)
- SPDR S&P Emerging Market (GMM)
- SPDR S&P Emerging Middle East & Africa (GAF)
- SPDR S&P Emerging Asia Pacific (GMF) - Get Report
I'm taking a quick first look at all of these just out of the gate to give those of you with an interest in emerging market investment products a head start on your research. A couple of these probably will turn out to be better mousetraps, most likely GMM and GUR, but as a general rule of thumb I'd give these a couple of months or so to start to prove themselves.
A good place to start your assessment of any fund is its expense ratio, and for all these it's 0.60%. For now there is no dividend information available, but the methodology for composition is by market cap rather than dividend or some other "fundamental" measure.
The Price of China Exposure
The GXC compares, not surprisingly, to
iShares FTSE/Xinhua China 25 Index Fund
. These two funds are very similar in terms of sector weighting, stocks held and the weighting of the stocks held. The biggest difference I can see is the expense, and even there the difference isn't dramatic; GXC charges 60 basis points and FXI charges 74 basis points.
While I would not sell FXI to buy GXC (and incur a tax hit in order to save 14 basis points), once GXC has a little bit of a track record to look at, if they turn out to be as similar as I think they will, well, cheaper's usually better.
Eastern Europe Choices
The GUR offers the promise of something new -- except for those three closed-end funds that also invest in emerging (read: Eastern) Europe:
Central & Eastern European Fund
Templeton Russia Fund
Morgan Stanley Eastern Europe Fund
This means investors can choose between one indexed product and three actively managed products. The case for choosing the indexed product is that you always know what's in the fund, which makes integrating the region into a diversified portfolio easier.
As you might expect, all of the funds are heavy in Russian energy companies but the CEFs can sell out of energy at any time. An investor counting on one of the CEFs to provide a portion of a portfolio's energy exposure may end up with more or less energy than desired. Using GUR instead means always knowing within a percent or two what the energy weighting is.
Little Difference in Latin America
It would be logical to compare the GML to the
iShares S&P Latin American 40 Index Fund
. Both funds are heaviest in Brazil, with almost identical weightings of roughly 53%, followed by Mexico (28% for GML and 35% for ILF). Both funds' top-10 holdings include
and CVRD preferred,
. The sector weightings also look similar.
Candidly, I am hard-pressed to find a major difference between these two indexed funds. ILF is a little cheaper, charging 50 basis points to GML's 60 basis points.
Broad Fund, Specific Differences
The broad-based GMM is meant to compete against
iShares MSCI Emerging Markets Index Fund
Vanguard Emerging Market ETF
GMM does have a few unique characteristics relative to EEM and VWO. The first thing I noticed is that GMM has no exposure to South Korea, while that country is the largest component of EEM and WVO (15% of each fund). The largest country weights in GML are China at 15.07%, Brazil at 13.55%, South Africa at 12.36% and Russia at 11.17%, all of which also figure prominently in EEM and VWO. Anyone wanting to avoid South Korea (which is my personal preference) but use a broad-based product for emerging market exposure now can do that.
The sector weightings of GMM are quite similar to the others, except that GMM has roughly half the tech exposure of the other two funds, which I also view as a positive. When I buy an individual stock from an emerging-market country, I typically prefer the big bank, the big energy company or the big phone company from that country, so GMM is a little closer to my thinking about how to invest in emerging markets.
Different Mideast, Africa Focuses
The GAF might end up looking a lot like the
iShares MSCI South Africa Index Fund
. But another fund to compare GAF to is
, a closed-end fund that focuses on mining stocks.
South Africa is the largest country exposure in GAF at 65%, which is similar to the 58% in ASA; of course, EZA is 100% South Africa. Israel is the only other country with a prominent weight in GAF, at just under 19%. Egypt and Morocco each weigh in at 5%, but I don't believe that's enough for either country to have much influence except during extremely volatile periods.
GAF has a noticeably different sector makeup than EZA. Both are heaviest in financials, but GAF is 33% financials compared to 15% for EZA. Health care weighs heavily in GAF, at 9%, compared with effectively none for EZA. But this is mostly due to
being GAF's single-largest holding, at 7.69%.
The last fund of the bunch is GMF. This fund seems to be unique as Asia regional funds go.
Most of the others are titled "Asia ex-Japan" and are very heavy in Australia. Not so GMF. It's heaviest in Taiwan (26%) and China (19%). The exposure to Taiwan means that unlike the other new funds, GMF is fairly heavy in tech.
Most of the other funds also have a hint of frontier market ("frontier" defined as being in an earlier stage of development); GMF does too, with 0.90% exposure to Pakistan. I'm not concerned by that exposure in GMF. A lot would have to happen for Pakistan to move the needle at all.
All in all I am pleased to see some new blood in this space, and more is on the way. No single methodology can be the best, so the more the merrier. I'm looking forward to seeing which of these new SPDR funds becomes a go-to instrument. Keep watch over the next few months.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider SPDR S&P China, SPDR S&P Emerging Europe, SPDR S&P Latin America, SPDR S&P Emerging Market, SPDR S&P Emerging Middle East & Africa, SPDR S&P Emerging Asia Pacific, Templeton Russia Fund, Morgan Stanley Eastern Europe Fund and iShares MSCI South Africa Index Fund to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
At the time of publication, Nusbaum was long Teva Pharmaceuticals, CVRD and iShares FTSE/Xinhua China 25 Index Fund for client accounts, although positions may change at any time.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;
to send him an email.