NEW YORK ( TheStreet) -- Exchange-traded fund provider Emerging Global Shares last week listed its complete suite of emerging-market sector ETFs. Several of the funds look particularly interesting including the EG Shares Utilities GEMS ETF ( UGEM). The fund has 30 holdings and will charge a 0.85% expense ratio. The yield of the underlying index is 2.25% which will make for a low yield for the fund. The subsector weighting allocates 54% to what the index provider calls conventional electricity, 30% to alternative electricity with much smaller weightings to gas and water. At the country level, Brazil is the largest by far at 22% followed by India and surprisingly Chile at 14% each, Colombia 9%, Czech Republic 8% and Malaysia 7%. Conspicuously absent is China, which only weighs in at 5.5%. The small weight to China is a positive for several reasons including the fact that China is featured prominently in many emerging-market ETFs including many of the sector funds from EG Shares. In terms of volatility it is also a relief that the "alternative electricity" group in not made up entirely of Chinese solar companies which would have been easy to do, but not doing so allows the fund to offer large exposure to countries that are often difficult to access. The fund has several tiers of holdings with the three largest names, CEZ from the Czech Republic, Empresa de Energia de Bogota from Colombia and Companhia Energetica de Minas Gerais Cemig from Brazil, at 7% to 8% of the fund. There are nine companies at 4% to 5% of the fund and the remaining 18 stocks have much smaller weightings. One concern is the low trading volume. Granted, the fund only has a couple of days under its belt but there has been essentially no volume. Any ETF provider will tell you that liquidity is not defined by the number of shares traded but by the ability to get trades executed. This is true, but it might be more true for buy orders than sell orders and a little bit of skepticism for any low volume fund is warranted. As a practical matter, this issue is more relevant for advisers looking to trade for many clients; an individual needing a few hundred shares or less won't have a problem executing a trade on either side of the market.
Where many investors look to the utility sector for dividends, the low yield of UGEM means that it will be a price appreciation play on growth in these markets. Growth in Brazil and India will likely come from modernization of infrastructure that is desperately needed, and the growth for most of the other countries will come from playing a greater role in the world economic order (Chile, Colombia and Czech Republic the likely beneficiaries here). Where the yield of the fund will likely be a little under 1.5%, it might make sense to pair the exposure with another utility holding that has a higher yield. For example, Consolidated Edison ( ED) has a long track record for lower volatility than the Utilities Sector SPDR ( XLU) with a slightly higher yield. A combo of UGEM and Consolidated Edison could offer better growth potential when compared to the sector ETF with a similar volatility profile despite the emerging-markets exposure and a competitive yield. The real world application of a line of funds like emerging sectors in a diversified portfolio is not owning all 10 funds but the mixing and matching of various types of exposures including domestic, developed foreign, thematic and emerging to create a more specialized and diversified portfolio.
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