5 Emerging Markets ETFs Myths Debunked
For all the volatility, inflationary pressures and political concerns, among myriad other issues, one thing is certain: Investors love emerging markets ETFs. And it should be said that "investors" means both professionals and retail. After all, the third- and fourth-largest U.S. ETFs as ranked by assets under management are the Vanguard MSCI Emerging Markets ETF (NYSE: VWO) and the iShares MSCI Emerging Markets Index Fund (NYSE: EEM).
Combined, VWO and EEM are home to almost $94 billion in AUM. Said differently, the AUM total at those two ETFs is roughly the size of Puerto Rico's GDP. Plenty of other emerging markets funds are also home to AUM totals that lie well above $1 billion watermark, including the WisdomTree Emerging Markets Equity Income Fund (NYSE: DEM), the iShares FTSE China 25 Index Fund (NYSE: FXI) and the iShares MSCI Brazil Index Fund (NYSE: EWZ), just to name a few.
But despite the popularity of emerging markets ETFs, myths remain and some should be cleared up in the essence of leading investors to potentially better returns.
Myth #1: EEM & VWO Are Great For Broad EM Exposure Well, sort of. Ten countries comprise almost 89% of EEM's country weight and four – China, South Korea, Brazil and Taiwan – represent about 58% of the fund's weight on their own. To the point of South Korea and Taiwan, the International Monetary Fund and the World Bank don't even consider these countries to be emerging markets, so just how "emerging" EEM and VWO are is up for debate.
Myth #2: Brazil Is A Great Place To Do Business As we mentioned, EWZ is one of the most popular EM ETFs on the market today. It has almost $8.7 billion in AUM and other Brazil funds, the Market Vectors Brazil Small-Cap ETF (NYSE: BRF) comes to mind, have proven popular as well. Part of the reasoning for the popularity of the Brazilian investment thesis with Americans might be that there are a lot of Brazilian companies listed in the U.S. and folks wrongly assume that this is a free, open market easy to do business in.
In an interview with Benzinga earlier today, Capital & Crisis newsletter author Christopher Mayer dispels the notion that Brazil is a great place for foreigners to do business. Mayer said that according to the World Bank rankings of ease of doing business Brazil ranks lower than Pakistan and Rwanda. Ouch.
Just ask Chevron (NYSE: CVX) and Transocean (NYSE: RIG) about how easy it is to do business in Brazil. And for those that think Brazil's socialist tendencies have died, consider this: Brazilian President Dilma Rousseff was recently named to Time's list of the 100 most influential people in the world. Who wrote the commentary on Rousseff for Time? Argentine President Cristina de Fernandez Kirchner and we all know how easy it is do business in Argentina.
Myth #3: Colombia Has One Export And It's Not Legal Given the performance of the Global X FTSE Colombia 20 ETF (NYSE: GXG), this is a myth that should have been debunked long ago. After all, there isn't a cocaine futures market. Still, many Westerners have a hard time shaking this borderline ignorant view of this rising South American power.
Not only has GXG outperformed EWZ this year, the reasons continue to mount to considering investing in Colombia. The country is South America's third-largest oil producer and home to vast minerals deposits among other reasons.
Myth #4: BRICS ETFs Are The Best EM ETFs There's no doubt that over the past five years ETFs tracking the BRICS quintet – Brazil, Russia, India, China and South Africa – have delivered some stellar returns. However, no acronym is a guarantee of success. In fact, an acronym can be made up on the spot that is better than BRIC. We know because we did just that.
Myth #5: All Emerging Markets Are Hamstrung By Inflation Indeed, inflationary pressures are something to consider in many emerging markets. China and India have taught investors that lesson quite well. Still, there are some emerging markets where inflation isn't too pesky yet. The Philippines and Malaysia are two to consider.
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