When it comes to diversified, or multi-country, emerging markets ETFs, two funds reign supreme. Those being the Vanguard MSCI Emerging Markets (NYSEARCA:VWO), which will soon drop MSCI as its index provider, and the iShares MSCI Emerging Markets Index Fund (NYSEARCA:EEM).
VWO and EEM are the two largest emerging markets ETFs by assets. Both have superior brand recognition and both have delivered impressive performances over long-term time frames. Those factors might imply that VWO and EEM do not have worthy rivals in diversified emerging markets ETF realm.
Actually, the opposite is true. There are several diversified emerging markets ETFs that represent credible alternatives to the aforementioned juggernauts. Remember that in this case, "diversified" means the ETF offers decent exposure to a variety of countries and regions and holds a large number of stocks. For the purposes of this list, multi-country funds tracking just four or five countries with just 30 or 40 holdings were excluded.
With that in mind, here are some of the top diversified EM ETF ideas for 2013. In no particular order, of course.
FlexShares Morningstar Emerging Market Factor Tilt Index ETF (NYSEARCA:TLTE) In less than three months of trading, albeit somewhat quietly, TLTE has proven itself to be one of the better new ETFs to debut in 2012. TLTE has already attracted almost $37 million in assets and has outperformed VWO since early October.
South Korea, Taiwan, Brazil and China are TLTE's largest country weights and the ETF's 1,521 holdings familiar large-cap emerging markets names such as Samsung, Taiwan Semiconductor (NYSE:TSM) and Petrobras (NYSE:PBR).
Before investors go thinking they have seen this movie before, it is worth noting that TLTE really does "tilt" in a different direction. Meaning, the ETF's index is screened for value names and small-caps. As such, small-caps represent almost 30 percent of TLTE's weight, a high percentage for a fund of this type.
iShares Core MSCI Emerging Markets ETF (NYSEARCA:IEMG) It is fare to say that every ETF investor and his sister is aware of the fee war that has taken place among issuers in 2012. Perhaps it is too trite to say that investors are the beneficiaries of rampant fee cuts, but IEMG indicates that might be the case.
At its core, not pun intended, IEMG is the iShares vehicle for undercutting VWO on price. Rather than lower EEM's expense ratio, iShares simply created a new ETF, IEMG. IEMG charges 0.18 percent per year compared to 0.2 percent for VWO.
The iShares product is another China-South Korea-Brazil-Taiwan (in that order) heavy diversified EM ETF full of a familiar roster of holdings. In terms of what 2013 may have in store, as is the case with all the ETFs mentioned to this point, IEMG will benefit from continued bullishness in Chinese equities and a rebound for moribund Brazil.
SPDR S&P Emerging Markets Dividend ETF (NYSEARCA:EDIV) Emerging markets firms are upping their dividend game this year with the expect payouts from the 300 largest non-bank stocks in the MSCI Emerging Markets Index expected to rise to $52.2 billion from $48.9 billion last year.
Better still is the fact that from China to India to Russia and other developing nations as well, governments are forcing companies to pay higher dividends. Some state-owned firms are already decent dividend payers, but since their largest shareholders (the home government) often want more money, there is the potential for dividend growth and that buoys the case for EDIV in 2013.
Brazil and Taiwan, already two of the better emerging markets destinations for income investors, combine for nearly a third or EDIV's weight. Remember this: EDIV has a 5.7 to Russia where state-run firms are now required to pay a quarter of their profits in dividends.
WisdomTree Emerging Markets SmallCap Dividend Fund (NYSEARCA:DGS) The WisdomTree Emerging Markets SmallCap Dividend Fund is the dominant name among emerging markets dividend ETF focusing on small-caps and with a distribution yield of six percent, it is easy to see why. Year-to-date, DGS has risen 20.6 percent, including dividends paid. Noteworthy is the fact that the ETF's volatility of 15.7 percent makes it below that of large-cap focused rivals such as EEM and VWO.
Looking to 2013, DGS needs a couple of things to go right in order to repeat 2012's strong run. With Taiwanese equities dominating the fund at 23.1 percent of its weight, Taiwan either needs to keep the upside coming or multiple markets with DGS's fold need to rise to the occasion and step in the event Taiwan lags.
Second, DGS devotes 10.4 percent of its weight to Thailand, one of the best performing Asian markets in 2012. As the premier ETF for gaining exposure to Thai small-caps, DGS will benefit if that market continues to flourish. The primary risk to this thesis is that some experts are saying Thailand is overbought at the moment.
iShares MSCI Emerging Markets Minimum Volatility Index Fund (NYSEARCA:EEMV) The popularity of low volatility ETFs found its way to the emerging markets genre where it has proven wildly successful as well. As was previously noted, it is almost a foregone conclusion that EEMV crosses the $1 billion in AUM mark in 2013.
It was just a few months ago that EEMV had about $600 million in assets. Today, that total is over $817 million. Investors will have to take on a richer valuation for the privilege of EEMV's low volatility. The fund has a price-to-earnings ratio of 20.51 and a price-to-book ratio of 3.91, according to iShares data.
Those numbers are well ahead of what is found with EEM, implying investors are paying up to reduce beta. EEMV does that. The ETF's beta against the S&P 500 is 1.16 compared to 1.52 for EEM.
Alternative idea: PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSEARCA:EELV). EELV's country weights differ significantly from EEMV's, so while both are "low vol" plays, they are by no means close to being the same ETF.
PowerShares DWA Emerging Markets Technical Leaders Portfolio (NYSEARCA:PIE) Country exposure can make all the difference with diversified EM ETFs and PIE's 14.1 percent year-to-date gain may be just as attributable to what countries are not prominently displayed in the ETF as it would be to those that are. That is to say PIE has benefited from Brazil not being a large part of its lineup this year at a time when Brazil has been the worst performer among the BRIC nations.
In fact, PIE can be used as an alternative to or paired with BRIC-heavy funds because PIE's largest allocation to a BRIC nation is a 4.1 percent weight to China. Primarily, PIE is a play on Asia's secondary and tertiary markets as South Korea, Indonesia, Thailand and Malaysia represent over 48 percent of the ETF's weight.
What that means for 2013 is that it would be constructive if Indonesia sheds its laggard status. Next, PIE can keep climbing if Thailand and Mexico (9.8 percent weight) deliver anything close to the returns they have provided in 2012.
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