Making the Most from Emerging Market ETFs

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If you’re like many of our readers, you may be wondering what exactly an Exchanged Traded Fund, or ETF, is.

Investopedia defines it as: ‘A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.

If you buy an ETF it means you’re engaging in ‘passive investing’, instead of active investing.

With passive investing there is not a money manager actively involved in managing a pool of money, and actively taking their cut.

There are many benefits that an ETF offers.

ETFs can trades like a stock on the open exchange, so the average investor can gain easy access.

They have a low expense ratio. They offer the same features as an index fund, such as low turnover and diversification, while avoiding the high fees of actively managed funds.

The ETF offers diversification, because it tracks a group of assets.

And tax efficiency. Investopedia explains this concept fairly well:

The unique structure of ETFs enables investors trading large volumes (generally institutional investors) to receive in-kind redemptions. This means that an investor trading large volumes of ETFs can redeem them for the shares of stocks that the ETFs track.

This arrangement minimizes tax implications for the investor exchanging the ETFs since the investor can defer most taxes until the investment is sold.’ 

Today, I will show you some of the listed ETFs that track various emerging markets. The goal here is to find good ETF representations for indices, sectors and themes.

Let’s start with China.

Tracking the Chinese market

One fantastic ETF for the Chinese market is the PowerShares China A-Share ETF [NYSE:CHNA].

It is one of the few ETFs that track the Chinese market very closely.

As you can see from the chart below, the ETF was able to capture the massive gains in China’s market in late 2014.

For investors that are eager to get into Chinese A-shares, without buying the B-shares or using Hong Kong as a proxy, this is a good choice.

And remember, the main composite index captures the weighted average of all the stocks in the market. It means you can outperform the index by choosing only the shares that outperform.

Source: Yahoo Finance
Click to enlarge

India’s potential

I have been advocating India for a while now, but I am not the only one.

I have written quantitative forecasts for the Indian market in the coming years for subscribers to New Frontier Investor.

A mix of fundamental growth, industrialisation and what I call the ‘Modi factor’, or economic reform, in India will propel the nation forward.

So how can you get into the action?

The Ishares MSCI India [NYSE:INDA] is a great tracker for the Indian market. It tracks the BSE main index in India.

Source: Yahoo Finance
Click to enlarge

Consider Indonesia

There are many reasons for considering Indonesia as a top holding in your emerging market selection.

It is the fourth most populous country in world. It has strong growth fundamentals, and it is undergoing new economic reforms.

That all means Indonesia will continue to grow, and so will its stock market.

The Ishares MSCI Indonesia Investable Market Index Fund [NYSE:EIDO] does a good job tracking the Jakarta main index. It is definitely a good choice for you to invest into.

Source: Yahoo Finance
Click to enlarge

Ready for the bottom?

The Latin America region vastly underperformed last year.

However, this presents a golden opportunity for you to get into countries such as Brazil at a cheap level.

As I have written before, the fundamental outlook for Brazil is a bright one, and its stock market will rally.

Brazil is one of the major commodity exporters of the world. With the current oversupply situation in China, lower demand globally, and energy price deflation, things can’t get much worse for Brazil.

As a contrarian investor, a depressed market like Brazil, with lots of potential for growth, really catches my eye.

One of the ETFs you can use to track the Brazilian market is the Ishares MSCI Brazil Capped [NYSE:EWZ].

Source: Yahoo Finance
Click to enlarge

It has tracked the Sao Paolo index reasonably well. However, it does suffer from tracking errors in some periods.

However, I compared a number of ETFs for the Brazilian market, and the Ishares MSCI Brazil Capped ETF is a relatively better one to use.

South Africa still on the table

Despite a dismal fall in December, the South Africa market managed to regain some of its momentum.

South Africa is another major commodity exporter. Needless to say, today’s commodity deflation scenario negatively impacts its income.

However, the long term outlook of South Africa is an exciting one. Like many promising emerging market economies, development is powering the long term growth, and driving the stock market.

Source: Yahoo Finance
Click to enlarge

The above is the Ishares MSCI South Africa ETF [NYSE: EZA].

It is the only ETF I could find that tracks the market, and it did reasonably in 2014.

If you are a long term investor, you should absolutely look for opportunities such as these. They should outperform advanced economy stock markets by a huge margin.

Don’t forget Russia

It may be an understatement to say that Russia has not done great lately.

If you look at the chart below, you can see the unbreakable link between oil price and the Russian stock market.

Russia is another commodity exporter whose economy and stock market fluctuates with commodity prices.

Source: Yahoo Finance
Click to enlarge

To get exposure to the Russian market, which is shown by the Russian Trading System Cash Index (RTS.RS) in the chart above, the Market Vectors Russia ETF [NYSE: RSX] is a good ETF to use.

Source: Yahoo Finance
Click to enlarge

The other way to play the Russian market is of course to buy into oil itself, as shown above.

There is an ETF solution for that as well.

The iPath Pure Beta Crude Oil ETN [NYSE:OLEM] tracks the Russian market reasonably well.

If you are a contrarian investor, Russia is one of those golden opportunities for you.

However, nobody really knows how long it will take for the oil price to head back up. Low prices could stretch well into 2016.

There are much more that ETFs can offer. However, the key question remains what strategy you should use? Where to put your money? And for how long?

This is one of the topics I discuss at length with my readers in New Frontier Investor.

I will be bringing more ETF strategies to the table in the future.


Ken Wangdong,
Emerging Markets Analyst, New Frontier Investor

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