Under The Hood: Emerging Markets to The Core


If you build it, they will come. That could be the sentiment of ETF issuers when it comes to emerging markets ETFs because despite slowing growth and rising volatility in the developing world, issuers keep churning out emerging markets funds.

Emerging Global Advisors, parent company of EGShares, has been one of the more prolific issuers of emerging markets ETFs. That is what comprises the firm's entire lineup. A lineup that grew by one on Tuesday with the debut of the EGShares Emerging Markets Core ETF (NYSE:EMCR).

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The EGShares Emerging Markets Core ETF tracks the S&P Dow Jones Emerging Markets Core Index and feature an annual expense ratio of 0.7 percent, making it one the of the least expensive EGShares funds.

The Emerging Markets Core Underlying Index is an equally weighted stock market index comprised of 116 leading companies that S&P Dow Jones Indexes determines to be representative of all industries in emerging market countries.

Analysts, experts and pundits can debate what "core" emerging markets exposure exactly means, but it is clear that when it comes to EMCR, it means no exposure to Taiwan or South Korea. Continued classification of those two nations as "emerging" by some index providers has sparked debate.

EMCR does not leave room for such debate because the ETF offers exposure to just eight countries and three China, South Africa and India each receive weights of 15 percent. Brazil lands a weight of 10 percent while Russia chimes in at 8.8 percent. Chile, Malaysia and Mexico each account for 7.5 percent of the new fund.

Taking a new approach to emerging markets ETFs is nothing new for EGShares. The firm has previously argued against the efficacy of broad emerging markets indexes such as the MSCI Emerging Markets Index. EGShares is also no stranger to unique ETFs.

Earlier this year, the firm introduced the EGShares Beyond BRICs ETF (NYSE:BBRC), which as its name implies, features no weights to Brazil, Russia, India or China. The EGShares Emerging Markets Domestic Demand ETF (NYSE:EMDD), which debuted in August along side BBRC, offers investors a more direct route to playing the promising trend of increased domestic consumption in various developing nations.

Regarding EMCR, the fund's sector mix has the potential to be a source of allure among investors that are tired of seeing financials and materials names dominate emerging markets funds. Combine financials, materials and energy the three sectors that usually loom largest in these type of ETFs and that is just 29.4 percent of EMCR's weight. Staples and discretionary names each receive weights north of 17 percent, making those sectors largest and second-largest, respectively, in the new ETF.

While the energy and materials sectors do not dominate EMCR at the sector, the fund's top-10 holdings, each of which has a weight of 1.25 percent, are littered with stocks from the aforementioned pair of sectors. EMCR's top-10 holdings include Russian energy giants Gazprom and Lukoil along with Brazil's state-run oil firm Petrobras (NYSE:PBR) and Vale (NYSE:VALE), the world's largest iron ore producer.

Obviously, it is too early to pass judgment on EMCR regarding performance. Perhaps the largest risks to the ETF getting off to a good start are continued woes for Chinese equities (though China ETFs have started to improve recently) and further declines for the rand, which could spell trouble for South African equities.

EMCR's potential near-term upside could be driven by the attractiveness of the Indian, Malaysian and Mexican markets.

For more on emerging markets ETFs, click here.

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