ETF Trends
ETF Trends

In our weekly recap, we pointed out net inflows activity that occurred last week in VWO (Vanguard Emerging Markets), which seems to be a reflection of bargain hunters emerging with the hopes that recent strength in U.S. domestic equities will carry over to the emerging markets economies.

Emerging markets have lagged in the past year or so, as the MSCI Index is down over 17% in the trailing one year period versus the SPX (S&P 500 Index) roughly unchanged, or down 0.22%. Emerging markets stocks clearly have the potential for higher volatility and downside risk than say U.S. large cap equities, but with greater risk comes greater potential reward as well.

In the emerging markets space, exchange traded fund issuer EGShares has emerged as a specialty issuer over the last several years, and one of the firm’s funds that we focus on today is AGEM (EGShares Dow Jones Emerging Markets Composite). Dow Jones selects 100 companies that are representative of the emerging markets that are seen as leaders across 10 industrial sectors.

From a composition standpoint, the exposure deviates a bit from VWO or EEM (iShares MSCI Emerging Markets), and AGEM is weighted as such from a country perspective: China (27.46%), Brazil (19.59%), Russia (13.84%), South Africa (11.82%), Mexico (9.61%), India (8.46%), Indonesia (2.82%), Chile (2.52%), Malaysia (2.12%), and the Czech Republic (0.77%).

VWO on the other hand, has the following “tilts” from a country basis: China (16.56%), South Korea (14.14%, Brazil 13.87%, Taiwan (10.84%), South Africa (7.65%), India (7.18%), Russia (6.01%), Mexico (4.70%), Malaysia (3.28%), and Indonesia (2.85%) with “other countries” composing the remaining 12.92% of the portfolio.

Notable differences in the makeups of these two indexes that are evident to us are the following: AGEM does not own South Korea nor Taiwan, as it likely sees these markets as “developed” instead of emerging, and AGEM is also tilted more heavily towards China, Brazil, Russia, and South Africa than the MSCI Emerging Markets Index (which we note, is an older index and over time, definitions of which countries should be classified as emerging versus developing have been much disagreed upon and thus, innovation in the EM space has been prevalent with the release of unique indexes and ETFs from providers such as EGShares).

Even though 2012 is barely upon us, AGEM has a leg up on VWO thus far, rallying 4.84% versus VWO’s gain of 3.69%, as China and Brazil are both up over 5 and 6% respectively just this year. Although AGEM only trades on average about 7,600 shares daily, investors should not shun the product on the basis of volume alone. Top holdings within the fund include well known large caps such as OGZPY, China Mobile, AMX, PBR, ITUB, and VALE to name a few.

EGShares Dow Jones Emerging Markets Composite

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