Market Overview

Under The Hood: Save This One For Later


On a day when traditional long ETFs of all stripes are showing up on traders' screens as a sea of red and investors are fretting about a double-dip recession, it's hard to be bullish on anything. Yet the show must go on and good market or bad, “Under The Hood” will continue unveiling compelling opportunities in the ETF universe.

This week's edition comes with aforementioned disclaimer: Save This One For Later. Problem is, no one knows when “later” will arrive.

In an ideal scenario, the market will snap out of these doldrums, the risk trade will come back into vogue and emerging markets ETFs will once again be favored by investors. All three scenarios need to come to pass to move the newly minted EGShares Basic Materials GEMS ETF (NYSE: LGEM) higher.

LGEM made its debut in late June as part of the new suite of GEMS emerging markets sector funds rolled out by Emerging Global Advisors, a firm whose entire ETF lineup is focused on emerging markets.

LGEM, which features an expense ratio of 0.85% and is home to 30 stocks, faces a problem and it isn't its concept. The idea of a basic materials ETF focused on emerging markets, while not totally unique, is a valid thesis. Rather, LGEM has been damned by timing. Simply put, these days no one wants any part of emerging markets or materials ETFs and their charts indicate as much.

LGEM faces another problem and it is one Benzinga has lamented several times in recent weeks regarding myriad other ETFs: Brazil. Brazilian stocks are in a bear market, but the country accounts for 17.3% of LGEM's weight. Vale (NYSE: VALE), the world's largest iron ore producer, is the new ETF's top holding with a weight of 10.5% and two other Brazilian stocks are found among LGEM's top-10 holdings. Yikes.

The 16.6% weight to Russia means LGEM has “less bad” emerging markets exposure as Russia has been the top BRIC performer this year, but the same allocation to China is problematic. A weight of nearly 15% to India is not good news in this environment either.

Bottom line: LGEM should be a fine ETF and it might well be considered even better than fine at some point. Problem is, that isn't going to happen anytime soon. Save LGEM for later.

Posted-In: Long Ideas News Sector ETFs Short Ideas New ETFs Emerging Market ETFs Commodities Global


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