3 Low-Cost Emerging Market ETFs

by Kyle Woodley | March 13, 2012 6:30 am

The U.S. economy still is trying to claw its way out of recession. Half of the eurozone is broke — and the other half is shelling out financial floatation devices. Chinese “slowdown”[1] be darned, China and the rest of the emerging world still seem like ideal places to invest for growth.

The makers of exchange-traded funds know it, too. To date, almost 70 ETFs have been launched for the sole purpose of profiting from emerging markets. So if you’re dead-set on hopping into your Gulfstream and perusing the rest of the equity world, where’s the best place to start?

Well, one place is price. While you can trade ETFs through your brokerage account, it’s not free. Past the fees charged by ETrade (NASDAQ:ETFC[2]) and others, ETFs also have additional expenses — listed as the “expense ratio” — that they bake into returns to help pay for fund managers, administrative costs and the like. And some funds can take 1% or more[3] for their services.

But thrifty investors needn’t be left out of the game. Here’s a look at three emerging-market ETFs you can buy on the cheap:

Vanguard MSCI Emerging Markets ETF

The Vanguard MSCI Emerging Markets ETF (NYSE:VWO[4]) is as inexpensive an emerging-market fund as you could want, tracking the MSCI Emerging Markets Index for just a skimpy 0.2%.

VWO has almost $55 billion in assets, so it’s certainly not a fly-by-night fund. And it’s diversified, holding more than 900 stocks — though almost 19% of VWO’s assets are wrapped up into its top 10 holdings. Highest weightings go to tech giant Samsung (PINK:SSNLF[5]), Brazilian energy stock Petrobras (NYSE:PBR[6]) and miner Vale (NYSE:VALE[7]), chipmaker Taiwan Semiconductor Manufacturing  (NYSE:TSM[8]) and Russian oil giant Gazprom (PINK:OGZPY[9]). But despite being absent from the top five individual names, financials as a group make up the largest overall block of holdings, at more than 20%.

From a regional standpoint, Asia is an unsurprisingly enormous part of the fund’s holdings, with China, South Korea, Taiwan, India and Russia alone accounting for more than half. Brazil (15.5%) and South Africa (7.6%) also make up huge chunks.

VWO has earned a four-star Morningstar rating, boasting a return of about 33% over the past three years that beats the diversified emerging-market average of about 29%. And its year-to-date return of 15.6% is just barely below its rivals’ average of 16.4%.

iShares MSCI Emerging Markets Minimum Volatility Index Fund

The iShares MSCI Emerging Markets Minimum Volatility Index Fund (NYSE:EEMV[10]) is an odd — but not necessarily contradictory — blend trying to tap emerging markets’ potential for rapid growth while mitigating the risks usually associated with them.

EEMV is smaller than VWO both in net asset value (about $100 million) and holdings (200+), and its top 10 holdings make up about 15% of its value. However, EEMV does have a comparatively heavy weighting in financials, at about 22%. The Asian heft is a bit lighter — the aforementioned five countries make up about 45% of the holdings.

A couple notable differences: At 15.11%, Taiwan has a marginally heavier weighting than China, and EEMV’s top individual holding — Colombian energy company Ecopetrol (NYSE:EC[11]) — actually is outside the traditional emerging-market country bigs.

At an expense ratio of just 0.25%, EEMV’s price is right, but investors should note that the fund has been around just a few months, so there’s little track record to go on. Its year-to-date return of 12.1% is lower than VWO and other rivals — but considering the fund’s purpose is to mitigate risk, EEMV’s best features might not show until emerging markets go south.

PowerShares S&P Emerging Markets High Beta Portfolio

Of course, on the other side of the safety card, there’s the Powershares S&P Emerging Markets High Beta Portfolio (NYSE:EEHB[12]). In addition to the usual risks inherent in investing in emerging markets, EEHB also targets the highest-volatility stocks it can find in those regions. And since it’s been around for less than a month[13], there’s little to tell us how it will fare when emerging markets in general are doing well or poorly.

But, if that’s your particular brand of vodka, EEMB isn’t wholly without its merits.

Despite the high-risk flavor, the High Beta Portfolio doesn’t weigh a single stock at more than 1%, and almost 70% of the fund is dedicated to large-caps.

And like the other funds, EEMB is financial-heavy — but it also gives you exposure to known names like Gazprom, Hong-Kong based energy stock CNOOC (NYSE:CEO[14]), Korean tech company LG Display (NYSE:LPL[15]) and Chinese online media company SINA (NASDAQ:SINA[16]). In fact, almost 70% of its holdings are tied up in Asian countries, so you’ll want to keep a watchful eye in that region.

Admission is a scant 0.29%, so the only heavy thinking you’ll need is about whether you’re steeled enough to handle the risk.

Kyle Woodley[17] is the assistant editor of InvestorPlace.com[18]. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @KyleWoodley[19].

Endnotes:
  1. Chinese “slowdown”: http://investorplace.com/2012/02/china-investors-year-of-the-draggin/
  2. ETFC: http://studio-5.financialcontent.com/investplace/quote?Symbol=ETFC
  3. can take 1% or more: http://investorplace.com/2012/03/the-7-priciest-etfs-and-what-you-get/
  4. VWO: http://studio-5.financialcontent.com/investplace/quote?Symbol=VWO
  5. SSNLF: http://studio-5.financialcontent.com/investplace/quote?Symbol=SSNLF
  6. PBR: http://studio-5.financialcontent.com/investplace/quote?Symbol=PBR
  7. VALE: http://studio-5.financialcontent.com/investplace/quote?Symbol=VALE
  8. TSM: http://studio-5.financialcontent.com/investplace/quote?Symbol=TSM
  9. OGZPY: http://studio-5.financialcontent.com/investplace/quote?Symbol=OGZPY
  10. EEMV: http://studio-5.financialcontent.com/investplace/quote?Symbol=EEMV
  11. EC: http://studio-5.financialcontent.com/investplace/quote?Symbol=EC
  12. EEHB: http://studio-5.financialcontent.com/investplace/quote?Symbol=EEHB
  13. been around for less than a month: http://investorplace.com/2012/02/2-new-funds-target-investing-thrill-seekers-eehb-idhb/
  14. CEO: http://studio-5.financialcontent.com/investplace/quote?Symbol=CEO
  15. LPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=LPL
  16. SINA: http://studio-5.financialcontent.com/investplace/quote?Symbol=SINA
  17. Kyle Woodley: http://investorplace.com/author/kyle-woodley/
  18. InvestorPlace.com: http://investorplace.com/
  19. @KyleWoodley: https://twitter.com/#%21/kylewoodley

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