These ETFs Have Technology Problems
If someone an investor trusts were to tell that investor that over the past six months shares of Petrobras S.A. (NYSE: PBR) and PetroChina Co. (NYSE: PTR) were each down more than 31 percent, adding to the equation that shares of Ecopetrol SA (NYSE: EC) are off 43.3 percent and that the exchange traded fund that only holds Chinese banks is lower by 13.3 percent, the takeaway would logically be that this is another brutal year for state-owned emerging markets companies.
That is what the aforementioned oil companies and most Chinese banks are. The problem is these companies still sport mammoth market capitalizations, meaning they play pivotal roles in charting the courses for well-known emerging markets ETFs such as the Vanguard FTSE Emerging Markets ETF (NYSE: VWO) and the iShares MSCI Emerging Markets ETF (NYSE: EEM). VWO and EEM, the two largest emerging markets ETF by assets, are down an average of 16.9 percent over the past six months.
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There are some emerging markets ETFs that intentionally exclude state-controlled enterprises, which, in theory, should make these funds better than their traditional rivals. After all, by some estimates, companies owned by Beijing are stifling Chinese economic growth, keeping the world's second-largest economy from the go-go days of 8 percent GDP growth.
However, the WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (NYSE: XSOE) and the Emerging Markets Internet & ECommerce ETF (NYSE: EMQQ) have problems of their own as highlighted by an average six-month decline of about 20.7 percent.
As its name implies, EMQQ is an Internet and e-commerce, so its avoidance of state-controlled companies comes by way of its focus on companies familiar to U.S. investors, such as Alibaba Group Holding Ltd (NYSE: BABA) and Baidu Inc. (NASDAQ: BIDU).
Once high-flying Chinese Internet stocks have been a drag on EMQQ, an ETF where China is the largest country weight. Over the past six months, Alibaba, Baidu and Vipshop Holdings (NYSE: VIPS) are off an average of 36.3 percent. Those stocks combine for 17.5 percent of EMQQ's weight.
The WisdomTree Emerging Markets ex-State-Owned Enterprises Fund is a different animal with a similar problem: Betrayal by way of technology stocks. Tech is the largest sector weight in XSOE at 23.4 percent and tech-heavy South Korea and Taiwan are the ETF's largest and third-largest country weights, respectively, combine for 28 percent of the fund's weight.
In an average, or even a sort of bad year for emerging markets, it would not be unreasonable to see the iShares MSCI South Korea Capped ETF (NYSE: EWY) and the iShares MSCI Taiwan ETF (NYSE: EWT) be less bad than broader emerging markets ETFs. However, over the past six months, EWY and EWT are lower by an average of 18.8 percent. Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co. (NYSE: TSM), each of which account for excessive percentages of the South Korea and Taiwan ETFs, are big reasons why those funds have sagged.
Those stocks are top 10 holdings in XSOE are two Chinese Internet stocks.
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