An Emerging and Frontier Markets ETF Sandwich
March 7th, 2014 at 11:05am by Todd Shriber
Many investors that follow global markets, particularly the non-developed variety, are by now well aware that although some well-known diversified emerging markets exchange traded funds have traded higher over the past month, these funds have been disappointments over the past year.
Likewise, those same investors have probably heard plenty about the out-performance of developing world equities offered by frontier markets. Helped in large part by soaring Middle East equity markets, such as those in Kuwati, Qatar and the United Arab Emirates, frontier market funds have been outpacing their emerging rivals for over a year. [Middle East ETF Shining]
Therefore combining the emerging and frontier themes in one ETF wrapper might sound like a hit-or-miss concept. The Global X Next Emerging & Frontier ETF (NYSEArca: EMFM), which debuted in November, is proving to be something of a hit. At least in terms of performance. Since its debut, EMFM has traded slightly higher, no small feat during rough environment for emerging markets, particularly for an ETF that is heavily allocated to developing economies.
EMFM’s top-eight country allocations, a group that comprises almost two-thirds of the fund’s weight, are emerging markets, according to Global X data.
Part of the secret to EMFM’s success, the ETF is up 7.4% in the past month, is its index. The Solactive Next Emerging & Frontier Index, as its name implies, focuses more on the next breed of emerging markets. That is to say the index is, in its own right, a play on the growing beyond BRICs theme. [Beyond BRICs ETFs Solid in Early 2014]
That is right. Brazil, Russia, India and China are nowhere to be found in EMFM. Nor or highly advanced emerging markets South Korea and Taiwan. While Mexico, Turkey and Chile, 24.4% of EMFM’s weight, have disappointed this year, Malaysia, Thailand and Indonesia, 27.4% of the fund’s weight, have not.
“Countries represented in the index represent 24% of the world’s population, but just 12% of the world’s GDP and 8% of the world’s equity market cap,” according to Global X, indicating that as a satellite position for patient, risk-tolerant investors, EMFM has potential.
While EMFM is one of the few ETFs with exposure to what may appear to be rough and tumble markets such as Pakistan, Bangladesh, Gabon and Laos, the fund’s overall exposure to such markets is small relative to the aforementioned emerging markets. EMFM also diminishes single stock risk by nto devoting more than 1.5% of its weight to any of its roughly 200 holdings.
Two knocks on the fund are its combined 30% weight to materials and energy stocks and its small weights to consumer-related and technology shares. In the three-year period ending Dec. 31, 2013, sectors that trumped the MSCI Emerging Markets Index included technology, consumer staples and discretionary. Laggards included financials, energy and materials, which combine for half of EMFM’s weight. [An Emerging Markets Value Proposition]
Global X Next Emerging & Frontier ETF