BBRC, EMDD: New ETFs Go Beyond BRICs, Into Domestic Demand
Emerging Global Advisors expanded its ETF family with the August 15, 2012 launch (pdf) of EGShares Beyond BRICs (BBRC) and EGShares Emerging Markets Domestic Demand (EMDD). Both target what the company calls “less mature” single country and sector segments.
Capitalization-weighted emerging market vehicles usually tilt in favor of the BRIC nations (Brazil, Russia, India, and China), to the point that investors are arguably missing opportunities elsewhere. BBRC tries to address this with a BRIC-free multi-country approach.
EGShares Beyond BRICs (BBRC) (summary) seeks investment results corresponding to the INDXX Beyond BRICs Index, after ETF fees and expenses. The index is a 50-stock free-float cap-weighted measurement of emerging market companies excluding Brazil, Russia, India, and China. The index also omits South Korea and Taiwan, two nations we consider well-developed but are still categorized as “emerging” under many classification schemes.
Subtracting the BRICs, South Korea, and Taiwan leaves a country breakdown led by South Africa (18.7%), Mexico (18.5%), Malaysia (15.2%), Thailand (13.9%), and Indonesia (12.1%). Other markets represented in the index are Turkey, Chile, Colombia, Poland, Peru, and the Philippines. Individual stock holdings appear to be capped at 4.9%.
From a sector perspective, BBRC is heaviest in Financials (34.2%), Telecom (18.7%), and Energy (11.1%). BBRC has a gross expense ratio of 1.30%, but the sponsor is absorbing the amount above 0.85%.
EGShares Emerging Markets Domestic Demand (EMDD) (summary) has a different twist. Its benchmark INDXX Emerging Markets Domestic Demand Index includes only the five sectors the sponsor thinks are most influenced by local growth. The strategic goal is to ignore the export-based parts of the developing economies and participate in sectors most influenced by internal prosperity.
EMDD is not BRIC-free, but it is Financials-free, Energy-free, and Industrials-free. The index holdings are all in Telecommunications (29.6%), Consumer Staples (28.3%), Consumer Discretionary (26.0%), Utilities (10.7%), and Health Care (5.2%).
The index tracked by EMDD consists of 50 stocks under a free-float capitalization-weighted method in which exposure to any one stock is capped at 4.9% of the total. Presently, more than a third of the portfolio is in seven capped-out stocks. Top country weightings go to Mexico (24.8%), China (14.9%), and India (13.9%). A 1.38% gross expense ratio is reduced to 0.85% by the sponsor’s agreement to absorb part of the costs until at least April 27, 2013.
A single prospectus (pdf) dated April 27, 2012 covers both BBRC and EMDD.
Analysis/Opinion: With BBRC and EMDD, EGShares offers new depth to the international ETF universe, and the new ETFs will be assigned to the Emerging Markets category of the ETF Field Guide. Investors in many emerging market benchmarks are overexposed to the more-mature BRIC countries. BBRC helps fill the gap. EMDD provides a way to get around the heavy energy and materials weighting in other ETFs. We hope these ETFs are not ahead of their time.
Patrick Watson contributed to this article.
Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.