Chart of the day: Beyond BRICs

There is plenty of coverage out there now regarding the fierce Emerging Markets equity sell-off that has dominated much of 2014, and based on this week’s action thus far, seems to show little signs of laying off anytime soon.

EEM (iShares MSCI Emerging Markets, Expense Ratio 0.67%) and VWO (Vanguard Emerging Markets, Expense Ratio 0.18%) have been in daily focus as they have seen assets pour out of the funds via redemption activity, while options flows have been characterized largely by put buying, on very heavy trading volumes in both products.

However, when the smoke does clear and things settle back into more stable trading patterns, it behooves an ETF manager to pay attention to funds including but also outside of EEM and VWO in the EM space in terms of opportunity.

One such fund appears to have hit radars recently, BBRC (EGShares Beyond BRICs, Expense Ratio 0.58%), which launched back in August of 2012. As its name suggests, the fund was designed to provide equity exposure beyond the traditional “BRIC (Brazil, Russia, India, China)” countries, which some may even consider “old school” Emerging Market economies at this point, or at the very least very mature emerging economies.

The top country holdings in BBRC are Qatar (16.07%), South Africa (15.40%), Mexico (14.71%), Malaysia (11.27%), Nigeria (10.51%), and other countries like Turkey, Indonesia, Thailand, Poland, and Chile to name a few are represented in the index.

From a sector allocation standpoint, the fund tilts heavily toward Financial Services (36.34%), followed by Communication Services (19.94%), and Basic Materials (10.91%) in terms of top holdings. Recently, after speaking with the fund sponsor EGShares, and reviewing specific fund literature, a few excellent conceptual points surfaced that have resonated with us.

Primarily, EGShares questions the premise that BRICs can outperform over time, simply based on the fact that they had displayed out-performance in the past say from 2001-2007. Their argument is that the backdrop that allowed for such out-performance, including “favorably valuations, artificially low U.S. interest rates, China joining the World Trade Organization, and the commodities bull market from 2002-2007” no longer exists.