Upstart ETF provider Emerging Global Shares launched the latest in its series of sector-focused emerging markets ETFs this week. The EGS Dow Jones Emerging Markets Financials Titans Index Fund (EFN) began trading on NYSE Arca on September 16. This is the firm’s fourth ETF, joining its Energy (EEO), Metals & Mining (EMT), and Composite (EEG) funds.
EFN tracks an index from Dow Jones of 30 large banking, insurance, brokerage and other financial service stocks based in emerging market nations. The index is more than a little top-heavy from a country standpoint; China and Brazil account for about two-thirds of the portfolio according to the sponsor’s fact page for EFN. Add South Africa, India, and Malaysia and almost 90% of EFN is from only five countries. This isn’t necessarily a bad thing; it may enable the fund to outperform if these markets do well. The country-specific risk should be noted, however.
My friend Roger Nusbaum had some interesting pre-launch thoughts about EFN that are worth reading. I agree that the omission of countries like Russia, Chile, and others (Pakistan) seems strange for a fund that claims to cover emerging markets worldwide. Even stranger is the marketing material highlighting pictures from the excluded countries (Russia’s Micex and Pakistan’s Karachi Stock Exchange). Perhaps this will be resolved in a future index reconstitution. However, countries such as Taiwan, South Korea, and Israel will not be represented since they are classified as “developed” countries in the Dow Jones definition of emerging markets.
While EFN has its flaws, so do all ETFs. It is a welcome addition to the ETF universe and I hope to see it attract assets and trading volume.
Disclosure: No positions