Six New ETF Choices in Emerging Markets

A couple are likely to become better mousetraps.
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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

(FXI) - Get Report

. 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

(CEE) - Get Report


Templeton Russia Fund


and the

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

(ILF) - Get Report

. 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

America Movil

(AMX) - Get Report



(RIO) - Get Report

and CVRD preferred,


(PBR) - Get Report



(CX) - Get Report

. 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

(EEM) - Get Report

and the

Vanguard Emerging Market ETF

(VWO) - Get Report


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

(EZA) - Get Report

. But another fund to compare GAF to is

ASA Limited

(ASA) - Get Report

, 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

Teva Pharmaceuticals

(TEVA) - Get Report

being GAF's single-largest holding, at 7.69%.

Asia Anew

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;

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