ETF Showdown: EM Bank Battle
Statistically speaking, most multi-country emerging markets ETFs are sporting decent year-to-date returns. Likewise, many of the major ETFs tracking bank stocks can boast solid returns despite the usual amount of controversy that seems to always follow this sector.
It might be logical to assume that the combination of emerging markets and financials under the umbrella of one ETF would be working. That assumption is somewhat correct. Emerging markets ETFs have fallen on hard times in recent months.
Combine that with the volatility that the financial services sector has become known for, and it is no surprise that investors are not exactly falling over each other to get into emerging markets bank ETFs. That outlook may belie opportunities with these type of ETFs, meaning now might just be the time to compare two bank ETFs that focus exclusively on developing nations.
Those funds are the EGShares Financials GEMS ETF (NYSE: FGEM) and the iShares MSCI Emerging Markets Financials Index Fund (NASDAQ: EMFN). A cold dose of reality regarding these ETFs: Neither is going to win any volume contests (FGEM has not traded in three days and EMFN has average daily volume of just 450 shares), nor is either fund particularly cheap. FGEM charges 0.85 percent per year while EMFN charges 0.67 percent.
The pair share something else in common: Massive allocations to China. EMFN devotes 29 percent of its weight to banks in the world's second-largest economy while FGEM's China exposure tops 44 percent. China's banking sector has been embattled to say the least, but Chinese equities are also viewed as inexpensive at this juncture.
There is an argument to be made that emerging markets financials are trading at compelling valuations themselves. EMFN's price/earnings ratio is just under 13 and its price/book ratio just under two. FGEM is even cheaper with a trailing P/E of 8.6 and a price/book ratio of 1.6. By comparison, the iShares Dow Jones U.S. Financial Sector Index Fund (NYSE: IYF) trades for 22 times earnings with a price/book ratio north of two.
The bear case for both funds revolves more around country allocations than valuation. After China, EMFN features a seven percent weight to India while FGEM allocates more than 11 percent to embattled developing nation.
As is the case with China, India exposure for these ETFs cuts both ways. Indian equities have been beaten down to the point that some might argue the asset class is now cheap. Others would say India's slowing growth implies more pain is on the way for the country's capital markets. Overall, EMFN offers exposure to 19 countries, more than double the number found in FGEM.
Another issue to consider is yield. As is the case with many ETFs tracking U.S. bank stocks, EMFN's yield is not noteworthy. The 30-day SEC yield is just one percent according to iShares data. This is a point FGEM's because the fund's index yield is 3.75 percent.
Discretion being the better of valor, it is best to call this ETF Showdown a draw. That said, if global investors find the compelling valuations of Chinese and Indian equities too good to pass up, both ETFs will benefit. FGEM will just benefit a little bit more.
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