With the rapidly growing ETF product list, we thought it appropriate to differentiate like-products. Our attempt is to analyze funds among popular categories and compare their strengths and weaknesses against each other.
Expenses: BIK is 50 bps vs. BKF’s 72 bps. Although 22 bps is not a deal breaker by itself, the edge clearly goes to State Street's BIK.
Volume: Trading volume is fairly close. BIK trades approximately 235K shares per day vs. almost 300K shares for BKF. However, given BKF’s higher dollar price, the average value traded is rather significant. BKF beats BIK by more than a factor of 2. The winner is BKF.
Dividend and Yield: BIK has paid annual dividends thus far. Although BKF paid a semi-annual dividend in 2008, it doesn’t mean it will continue to do so. It is my belief that an investor purchasing either of these securities should look elsewhere if yield is a concern. Given that both funds pay timely in regards to their ex-date, it’s a tie.
Diversification: BIK as its moniker implies, has 42 holdings while BKF has 176. BIK has approximately 50% of its holdings in the top 10% of the fund vs. BKF has 36% in the top 10%.
Although both funds invest in Brazil, Russia, India, and China the weightings are slightly different, mostly due to BIK’s overweighting of China (49%) vs. BKF’s (35%) as well as BIK’s Russia exposure (21%) vs. BKF’s (13%). Sector exposure was virtually identical.
My personal preference is to lean towards more diversified funds. A 50% exposure to a single county that is only 1 letter in its acronym is a bit aggressive in my opinion and a country specific ETF would be a more appropriate choice.
I would also expect that as a capital appreciation play, it makes more sense to gain exposure to a smaller tier of companies through BKF’s larger holdings quantity. The winner is BKF
Valuation: Understanding I was looking at fairly dated numbers (3/31/2009), I saw little premium being paid by global emerging market companies versus their smaller counterparts. BIK’s Price/Book was .97 and Price/Earnings was 9.06 vs. BKF’s 2.43 and 14.32 respectively. I believe a case could be made for either side, but my vote goes with the value tilt. The winner is BIK.
Options: While a very thin, BIK does have some outstanding option contracts, albeit few. Not that we would recommend trading options for this fund as there is little market, however we commend the effort. The winner is BIK.
BIK wins in aggregate, however, it is my belief BKF’s diversification case held more weight than the other factors that allowed BIK to win. BIK had all the great benefits of an ETF, specifically optionability (barely), low fees and plenty of liquidity for most investors.
However, BKF’s higher expenses and valuation was justified given it had significantly more holdings in smaller cap names relative to BIK.
Therefore, if I was a long-term investor seeking BRIC exposure, I would put my money in BKF.
It is important to note the data referenced is as of March 31, 2009.
Disclosure: The author does not hold positions in either of these funds.