Under The Hood: Where's India? (EMFT, VWO, ILF)
There's has been a lot of chatter about ETF closures lately, but anyone can talk all they want because the clip of new ETF introductions has far outpaced closures this year. State Street's (NYSE: STT) State Street Global Advisors, the second-largest U.S. ETF sponsor, has been getting in on the act with some new emerging markets ETFs among others.
The SPDR S&P Small Cap Emerging Asia Pacific ETF (NYSE: GMFS) is doing pretty well for itself with over $7 million in assets under management in less than two months of trading and on the heels of that small-cap play, SSgA went in the other direction with the large cap-focused SPDR MSCI EM 50 ETF (NYSE: EMFT), which debuted yesterday.
With an expense ratio of 0.5%, EMFT tracks a free float-adjusted market capitalization- weighted index that includes 50 of the largest MSCI Emerging Markets Index constituents. The ETF currently holds 52 stocks, but we won't quibble over that.
It can be said the new SPDR fund feels a lot like a variation of ETFs such as the SPDR S&P BRIC 40 (NYSE: BIK) or the iShares S&P Latin America 40 Index (NYSE: ILF). Those ETFs have developed solid followings by focusing on roughly 40 large-cap stocks each, either in the BRIC universe or Latin America. Translation: Small number of stocks + large-caps that are recognizable to U.S. investors + emerging markets = New ETF idea.
The SPDR MSCI EM 50 ETF isn't BRIC-specific, but China, Brazil and Russia combine for over 54% of the fund's weight. Overall, the top five country weights represent about three-quarters of the new ETF's weight. In order, those countries are China, South Korea, Brazil, Russia and Taiwan. South Africa, Mexico and India fight for the remaining scraps.
The top-10 holdings in the SPDR MSCI EM 50 ETF make the ETF look like it pilfered a couple of names from the iShares MSCI Brazil Index Fund (NYSE: EWZ), the iShares FTSE China 25 Index Fund (NYSE: FXI) and the Vanguard MSCI Emerging Markets ETF (NYSE: VWO). That's not necessarily a bad thing. It just means experienced emerging markets investors will be familiar with a lineup that includes Samsung, Taiwan Semiconductor (NYSE: TSM), Petrobras (NYSE: PBR) and Vale (NYSE: VALE), among others.
The SPDR MSCI EM 50 ETF, like many comparable ETFs, is heavily weighted toward financials with a 23.3% allocation to that sector. Fortunately, that weight isn't dangerously high in this ETF as energy, technology, materials and telecom all land double-digit weights, too.
Overall, it's far too earlier to be too critical of the SPDR MSCI EM 50 ETF and it's too early to be heaping praise on the ETF either, though the idea is at least solid. That said, looking forward, there are a couple of issus to consider with EMFT. First, South Korea and Taiwan stand an excellent chance of losing their emerging markets status this year. Those are cash markets, so EMFT's index would have to rebalance to include securities from other emerging markets, creating potential tax issues for investors along the way.
That may or may not happen, but our second point is a certainty: India has been on fire this year, but EMFT features a mere 2.34% allocation to that country and that would be the biggest knock for now on the new fund.
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