Broad ETF Makes Surprisingly Narrow Bets

NEW YORK ( TheStreet) -- Emerging Global Shares joined the exchanged traded fund scene earlier this summer with two game enhancing (as opposed to game changing) ETFs that invest in developing markets. This week, it introduced a third, the Emerging Global Shares Dow Jones Emerging Markets Titans Composite Index Fund ( EEG).

This fund, one of 11 developing-markets funds that Emerging Global Shares plans to launch, aims to invest more broadly. It will compete with the iShares MSCI Emerging Markets Index Fund ( EFA), the Vanguard Emerging Markets ETF ( VWO), the WisdomTree Emerging Markets Equity Income Fund ( DEM) and the PowerShares FTSE RAFI Emerging Markets Portfolio ( PXH).

Emerging Global Shares has been trying to differentiate itself by introducing international funds that invest in specific sectors. So why is it introducing a composite fund when there are already so many vying for investor dollars? Emerging market exposure at the sector level will help a lot of people, but this fund invests more narrowly than one would expect based on its title.

The Emerging Global Shares fund's underlying index allocates 20% of its assets to both China and Brazil, 18% to India and 14% to Russia -- so-called "BRIC" countries. That doesn't leave much room for other places. In contrast, other funds usually have large allocations to South Korea, Taiwan and Malaysia.

Energy and financial stocks account for half of the fund's assets, a larger weighting than competing funds. Given the country weights, this shouldn't be shocking. Some of the largest stocks in China and Russia are oil companies.

The ETF's largest holding, Industrial and Commercial Bank of China, accounts for 8% of assets. If you're considering buying shares of the fund, it would be wise to do some research about such a big holding.

The fund buys the 10 largest stocks by market cap from each of the 10 industries tracked by the Dow Jones Emerging Markets Titans indices, a total of 100 stocks. The expense ratio is capped at 0.75%. The trailing dividend for the index is 1.73%, which might mean the fund could be expected to yield 1%, but that remains to be seen.

The ETF is more similar to a BRIC fund like the SPDR S&P BRIC 40 ETF ( BIK). This fund has 48% of its assets in China, 26% in Brazil, 19% in Russia and only 5% in India. It also invests heavily in energy and financial stocks, so it owns a lot of the same names.

Despite the seemingly broad scope of the Emerging Global Shares fund, its investment universe is quite narrow, suggesting it could be more volatile. If it performs like the SPDR S&P BRIC fund, there will be periods when it outperforms broader indices by 10% to 20%. But, at other times, it will lag badly.

-- Reported by Roger Nusbaum in Prescott, Ariz.
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; click here to send him an email.

If you liked this article you might like

Emerging-Market ETFs a Battleground

Emerging-Market ETFs a Battleground

ETF Trend: Leveraged and Emerging

ETF Trend: Leveraged and Emerging