When it comes to equal-weight exchange traded funds, investors are usually accustomed to seeing an ETF where each component has roughly the same allocation, though some funds offer an equal-weight sector approach.
The Guggenheim MSCI Emerging Markets Equal Weight ETF (NYSEArca: EWEM) is taking a different approach. With its recent index switch to the MSCI Emerging Markets Equal Country Weighted Index, EWEM becomes a pioneer. According to MSCI (NYSE: MSCI), one of the largest providers of indexes to ETF issuers, the MSCI Emerging Markets Equal Country Weighted Index, is the first emerging markets benchmark that equally weights its country components.
EWEM’s name has changed to the Guggenheim MSCI Emerging Markets Equal Country Weight ETF, according to a statement.
EWEM has trailed the cap-weighted iShares MSCI Emerging Markets ETF(NYSEArca: EEM) by 210 basis points over the past year, but the Guggenheim offering has its advantages, including reduced exposure to state-controlled enterprises. As seasoned emerging markets investors know, there are times when state-run companies disappoint investors. Six such firms combining for over 6% of EEM’s weight are found among that ETF’s top-10 holdings. [Equal-Weight Works With Emerging Markets ETFs]
“The MSCI Emerging Markets Equal Country Weighted Index offers large- and mid-cap representation across 23 countries and is rebalanced semi-annually. With 834 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country,” according to statement.
At the end of 2014, EWEM allocated 14.1% of its weight to Taiwan and 13.9% to China. South Korea and India combined for another 20% while Brazilian and Russian stocks combined for over 9% of the ETF’s weight.
The transition to equal-weight country index helps EWEM mitigate another common criticism of cap-weighted emerging markets ETFs: Significant allocations to the BRIC nations that make a supposedly diversified ETF look more like a de facto BRIC fund. The BRIC nations combine for 41.2% of EEM’s weight. [Be Selective With BRIC ETFs]