First there were sector ETFs. Then there were emerging-markets ETFs. Now, in the never-ending quest to slice the pie thinner and thinner, we have emerging markets sector ETFs.
According to the official press release, a new company called Emerging Global Advisors (EGA) this week (Thursday 5/21/09) launched the first two of a planned series of twelve ETFs designed to track industry sectors in emerging markets. Listed on the NYSE, the new funds are EGA Emerging Markets Energy Fund (EEO) and EGA Emerging Markets Metals & Mining Fund (EMT). There was no mention of when the other ten ETFs would start trading.
The funds from EGA will follow the Dow Jones Emerging Market Sector Titans Indexes. Each of the 11 sector ETFs will consist of 30 holdings while the “composite” ETF will have 100. EEO (fund fact sheet and index fact sheet) will hold 30 energy companies from 13 different countries, while EMT (fund fact sheet and index fact sheet) has 30 metals and mining stocks spread across nine countries. EGA has agreed to cap the expense ratios at 0.85% for one year (0.75% for the composite ETF).
My first thought on hearing about these funds is that they will have a hard time offering much liquidity. However, management believes liquidity will actually be a strong attraction for their ETFs because these products will be listed in the US and not be subject to the liquidity concerns of some foreign markets.
Richard Kang, who serves as the firm’s director of research, noted that developing markets can run into rather severe liquidity problems at times. He pointed to the fact that stock exchanges in several emerging countries have been forced to completely shut down. That was the case in Russia during much of the worst of the global financial crisis, among others.
By taking a sector perspective across several different markets, he believes that traders will be able to cushion their exposure to such liquidity problems and diversify their portfolios in different ways. “The Emerging Global Shares ETFs are designed to give investors the ability to execute active investment management strategies in markets where the liquidity to trade is not always available,” said Kang in a statement. [IndexUniverse]
To me this sounds like a stretch, but presumably Mr. Kang has studied the potential problems and thinks he has a solution. However, if some of the underlying shares have liquidity problems from whatever cause, I believe it will have a negative impact on the liquidity of these ETFs through wider bid/ask spreads, inability to perform in-kind exchanges, or both. Time will tell.
In its first two days of trading, EEO had a total volume of 3,640 shares. EMT seemed to draw more interest, trading 15,040 shares in the same two days.
Emerging Global Advisors has a big marketing challenge. US investors have been reluctant to embrace non-US sector ETFs. The SPDR International Sectors, WisdomTree International Sectors, and iShares S&P Global sectors families are struggling. Even the domestic sector ETF lineups are facing overcrowded conditions as PowerShares just closed their FTSE RAFI Sector ETFs, and the Rydex Equal-Weight sector products have not caught on.
As of early Friday, EGA still did not have an active website, an unheard of shortcoming in this day and age. Checking back today, it appears their website has now launched too. The prospectus covers all twelve ETFs that are part of the new trust. The website contains fact sheets for each ETF as well as their indexes.
Disclosure: no positions