I’ve never been a big fan of the iShares MSCI Emerging Markets ETF (EEM) because I consider it to be one of the most poorly-named funds in history.
It’s a great ETF—so long as you’re looking for exposure to companies that have already emerged.
Up until its recent rebalancing, the two countries with the highest representation in the fund were South Korea and Taiwan. These two Asian tigers—which both have living standards comparable to Western Europe—are now ranked second and fourth among the ETF’s holdings, though the two largest individual stock holdings remain South Korea’s Samsung (SSNLF) and Taiwan’s Taiwan Semiconductor (TSM). Great companies, no doubt, but hardly “emerging market” stocks.
The Czech Republic and Poland—which are proud members of the European Union—are also represented in EEM, and up until very recently so was Israel—one of the most technologically advanced nations on earth.
So I’ll repeat my chief complaint about EEM—it’s an ETF that does not live up to its name as an “emerging market” investment option.
And what about the BRIC economies of Brazil, Russia, India and China? Would a fund targeting the BRICs, such as the SPDR S&P BRIC 40 (BIK) be a better option?
Only marginally. Let’s ignore for the time being that the BRIC countries have had terrible performance runs in the past couple of years and focus again on portfolio holdings. To start, Russia is not an “emerging market.” It’s a petrostate facing terminal population decline and a loss of economic influence as oil and gas production shifts to the United States. So, one fourth of the BRIC quartet should be uninvestable for anyone looking for long-term growth. And while China, India, and Brazil all have their selling points, these three countries do not by any stretch comprise the entire emerging market universe.
This brings me to an ETF that addresses this major shortcoming, the EG Shares Beyond BRICs ETF (BBRC), which is indexed to the FTSE Beyond BRICs Index. The ETF has a 75% weighting to more advanced emerging-market economies—such as Mexico, Indonesia, Turkey and South Africa—and a 25% weighting to up-and-coming frontier economies, such as Nigeria, Kenya and Vietnam.
Significantly, the index excludes the BRIC countries as well as South Korea and Taiwan. It’s a one-stop shop for the countries to which most investors have little or no exposure.
So, how are we to put this ETF to work?
Emerging Global Advisors, the managers of BBRC and several other innovative emerging-market ETFs, created some model portfolios using assorted emerging market ETFs (see page 21 of their report). There are different ways to implement this, but I would recommend something along the following lines:
- Ditch EEM or any mutual fund you might have that tracks the MSCI Emerging Market Index.
- Invest 40% of the portion of your portfolio dedicated to emerging markets to my favorite long-term emerging-market ETF holding, the EG Shares Emerging Market Consumer ETF (ECON).
- Invest 30% each to emerging market ETFs that track the BRICs and the “Beyond BRICs,” such as BIK and BBRC, respectively.
- Rebalance at least annually.
These weightings do not have to be particularly precise, and there is plenty of room for you to overweight or underweight any of these ETFs based on market conditions or valuations. The key here is to get broad exposure to the real underlying macro trend—the rise of the Emerging Market Consumer—and to avoid limiting your exposure to just a handful of countries that have already largely emerged.
Sizemore Capital is long ECON.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management.