The Final Frontier

Ulli Uncategorized Contact

The WSJ reports that ETFs are reaching the more remote corners of the world in “ETS Aim to Tame the Final Frontier:”

Exchange-traded funds are launching to focus on emerging-market nations, particularly the smaller ones that lack the allure of giants like India and China.

The freshest entry is Van Eck Global’s Market Vectors Poland ETF (trading symbol: PLND), which began trading on NYSE Arca on Nov. 25. The fund tracks the Market Vectors Poland Index and invests mostly in companies with market capitalizations of at least $150 million that are based or primarily listed in Poland or that generate at least 50% of revenue in the country.
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In the spirit of the Van Eck effort, Emerging Global Advisors offers ETFs that target emerging markets’ basic materials, consumer goods, consumer services, and metals and mining. In addition, Global X Management rolled out two sector-specific China ETFs, the Global X China Consumer ETF (CHIQ) and the Global X China Industrials ETF (CHII), on the New York Stock Exchange this week. The company also offers funds covering companies in Colombia and Scandinavia.
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Ensuring quality in a fund’s potential stocks always is a challenge. Van Eck’s new Poland ETF has strict requirements to vet member companies. Each stock must have a three-month average daily trading volume of at least $1 million and must have traded at least 250,000 shares a month over the last six months. As of Oct. 31, the Market Vectors Poland Index had 26 constituents, and its top sectors were financials, energy and industrials.

These frontier-country ETFs continue to do relatively well in terms of drawing assets, but because liquidity is limited, a danger exists that the funds could end up driving small markets, said Morningstar’s Mr. Burns.
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Demand for such ETFs is overshadowed by that for larger emerging nations, said Mr. Burns. These niche ETFs can’t compare to the iShares MSCI Brazil Index Fund (EWZ), which has $11.6 billion in assets, according to Morningstar.

Market Vectors Vietnam ETF (VNM) started in August and now has $79.5 million in assets, while Market Vectors Brazil Small-Cap ETF (BRF), which debuted in May, has $606.3 million, says Morningstar. In addition, Market Vectors Indonesia Index ETF (IDX), which was launched in January, has $184.9 million.

While it is too early to tell which of these new ETFs will survive, I consider them only appropriate for aggressive investors. Sticking with the more general indexes, which may include exposure to some of these countries, is a more conservative way to participate.

Some of these ETFs may very well move sharply and erratically as individual stocks do, which does not make them a good candidate for trend tracking. The reason that trend tracking works well with mutual funds and most ETFs is that some of the volatility has been removed due to broad diversification.

If you get involved in ETFs of relatively small emerging countries, you are adding lack of diversification back into the equation, which makes it more difficult to apply simple trend tracking rules. Just because these products are offered, does not make them a suitable addition to your portfolio.

Steady long-term growth is preferable in my book as opposed to introducing a casino like element that may add a questionable outcome.

I have no holdings in any of the ETFs mentioned in this article.

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Comments 4

  1. Ulli,
    Would you ever consider purchasing a highly respected mutual fund (closed to new investors, good performance, ecellent management team, low fees, low portfolio turnover, etc) that had a 1% redemtion fee if held less than 1 year?

    Assume stop loss targets would be honored even if the fund had not been held for a year.

    Thanks,
    Paul G.

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