Under The Hood: Not The Right Time

Those not living in a cave know the deal with U.S. and European bank stocks. To put it simply and nicely, there have been better places to put your money in recent months and chances are there will be better places to put your money in the months ahead. Debt crises, stress tests and a glaring lack of decent dividends make investing in developed market bank stocks practically a waste of time. And if it's dicey to invest in U.S. bank stocks, then the perception, accurate or not, becomes that it's just as risky to roll the dice on financial stocks in the emerging markets. That explains the difficult road the EGShares Financials GEMS ETF

has traveled since its debut 26 months ago. We'll go under the hood today with FGEM to see if this ETF has some opportunity for patient investors or if it's best left alone until we have a legitimate bull market on our hands. Putting a finger on the recent woes of the EGShares Financials GEMS ETF isn't that hard. Just look at the country breakdown of the ETF. China, Brazil and India account for almost two-thirds of the fund's weight. In other words, we could call FGEM the “inflation nation” ETF. At almost 12%. South Africa is the only other country to get a double-digit allocation in FGEM. To date, the 30-stock ETF with an expense ratio of 0.85% has managed to accumulate nearly $5 million in assets under management. FGEM tracks the Dow Jones Emerging Markets Financials Titans 30 Index. Constituents are selected by float-adjusted market capitalization, revenue and net profit. Predictably, 2011 has not been kind to FGEM. As we noted, financials, regardless of home domicile, have been punished. Factor in how badly Chinese, Brazilian and Indian equities have performed and you've got the recipe for a 34% year-to-date decline. Once upon a time, earlier this year actually, FGEM was flirting with $27. Today, it resides around $16.50 with an ugly chart that shows a decline to support at $14 is likely should emerging markets remain out of favor. There's not much in the way of a silver lining for FGEM at the moment except for the following: The ETF does have a dividend yield of 4.8%. At the very best, that says an extremely patient investor can get involved with FGEM here with a small position and add into it periodically. Unfortunately, that's the best prognosis we can offer up at the moment. Bull case: Inflation in Brazil, China and India rapidly disappears. Financials AND emerging markets come back into style. It's that simple. Bear case: Emerging markets inflation remains a problem and developed market financials continue to lag, pressuring their EM counterparts in the process.