Under The Hood: Beyond BRIC

The BRIC quartet of Brazil, Russia, India and China have held a dominant perch in the emerging markets investment landscape since Goldman Sachs (NYSE:GS) coined the catchy acronym more than a decade ago. Since BRIC became common nomenclature, the countries and many of the corresponding ETFs have enjoyed times when they have delivered stunning growth and returns to investors.

That does not mean BRIC is the only story worth listening to in the emerging markets universe. In a year when the BRIC nations are experiencing myriad economic issues, it makes sense for investors to go beyond BRIC.

One new ETF helps investors do just that: the EGShares Beyond BRICs ETF (NYSE:BBRC). The EGShares Beyond BRICs ETF debuted last week and despite the fund's obvious youth, it is easy to characterize the fund one way: It is not the run of the mill multi-country emerging markets ETF.

That designation applies to the Vanguard MSCI Emerging Markets ETF (NYSE:VWO) and the iShares MSCI Emerging Markets Index Fund (NYSE:EEM), the two largest emerging markets ETFs. VWO and EEM are certainly big and popular, but the relevance of these two funds is arguably slipping because of excessive exposure to BRIC, South Korea and Taiwan.

The status of South Korea and Taiwan as emerging markets has been continually questioned by many market observers in recent years, yet those countries combine for 26 percent of EEM's weight. Throw in BRIC and the six countries represent over two-thirds of EEM's total weight.

BBRC takes a different approach, but that does not mean substantially more risk. South Africa, a market that is mature enough to have become the "S" in BRICS, is the new fund's largest country weight at 18.7 percent.

Mexico, a market that some noteworthy investors believe is loaded with ample long-term potential, receives a weight of 18.5 percent. That is far larger than what EEM and VWO allocate to the second-largest Latin American economy.

BBRC also does not cheat investors out of exposure to Asia. Malaysia, Thailand and Indonesia combine for over 41 percent of the fund's weight. Emerging Europe by way of Turkey and Poland is another 10 percent of BBRC's weight. The country exposures are Chile, Colombia, Peru and the Philippines.

As is par for the course with many emerging markets ETFs, BBRC is heavily weighted to financial services and telecommunications names. Those sectors combine for 53 percent of the fund's weight. Oil, consumer staples, consumer discretionary, industrials and utilities are also featured.

In terms of valuation, the Beyond BRICs Index has a trailing price-to-earnings ratio of 17.5 and a price/book ratio of 3.3, according to EGShares data. Those numbers are higher than the broader emerging markets universe, but not surprising given that markets such as Mexico and Malaysia have been delivering superior returns compared to more mature developing nations. The index also sports a decent dividend yield of 3.25 percent, which is more than 100 basis points better than the dividend yield on EEM.

There are two strikes against BBRC. First, an expense ratio of 0.85 percent is high, even for an emerging markets ETF. That means the ETF must deliver impressive returns to entice investors to pay up for the fund. Second, South Africa is a concern. ETFs tracking BBRC's next three largest country weights have easily outperformed the iShares MSCI South Africa Index Fund (NYSE:EZA) this year. The country's high unemployment coupled with political volatility imply a degree of risk that is not found many of BBRC's other country weights.

Overall, BBRC's concept is intriguing and arguably much-needed in a world of BRIC-dominated funds. Given the new ETF's exposure to some of the best-performing emerging markets, investors do not need to wait on this fund simply because it is new.

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