Back in October, I highlighted EG Shares’ new emerging market option, the Beyond BRICs ETF (BBRC). BBRC is the first ETF for emerging markets that specifically excludes the “BRIC” countries of Brazil, Russia, China and India.
This strategy caught my attention because I’ve never been a big fan of the BRICs as an investment theme. The countries comprising the BRIC were chosen more for their ability to be combined into a marketable acronym than for any coherent investment rationale.
As I wrote in the last article, Russia is not one of the emerging markets. It’s a petrostate facing terminal population decline and a loss of economic influence as oil and gas production shifts to the United States. So, one-fourth of the BRIC quartet should be uninvestable for anyone looking for long-term growth. And while China, India, and Brazil all have their selling points, these three countries do not by any stretch comprise all of the emerging markets. Rising stars such as Mexico, Turkey, Indonesia and South Africa are left out completely.
As the BRICs have sputtered in the past few years, investors have been looking for ways to invest in these overlooked markets, prompting the creation of BBRC. And this month, State Street unveiled a competing ETF product, the SPDR MSCI Beyond BRIC ETF (EMBB).
So, why should we choose one ETF over the other? How are they different?
In terms of fees, a common differentiator among competing products, EMBB has an edge. BBRC has a slightly higher expense ratio — 0.85% vs. 0.55%.
But the real difference between the two is in portfolio composition and, in particular, the inclusion of South Korea and Taiwan. BBRC specifically excludes South Korea and Taiwan due to their much larger market caps and higher levels of development, whereas EMBB includes them. (You can view BBRC’s holdings here and EMBB’s holdings here).
EMBB caps the exposure to any single country at 15%. But given the respective sizes of the South Korean and Taiwanese markets, it is safe to assume that these two countries will always make up a combined 30% of the emerging markets portfolio, allowing for portfolio drift between annual rebalancings.
Looking at the rest of the portfolio, there’s a lot of overlap. Both EMBB and BBRC have heavy exposure to South Africa, Mexico, and Malaysia for example. BBRC has better exposure to “frontier” markets such as Nigeria, Kenya and Vietnam — something I consider a plus. But the biggest difference between the two ETFs is, by a wide margin, the inclusion or South Korea and Taiwan.
Now, I should be clear: Exposure to South Korea and Taiwan is not inherently bad. I’m currently very bullish on both countries, in fact. But I do have a problem with State Street classifying them as emerging markets. The popular iShares MSCI Emerging Markets ETF (EEM) does the same, and I consider it grossly inaccurate. South Korea and Taiwan are not emerging markets, because they have already emerged. Both have living standards comparable to the West. These are established Asian economies, not up-and-coming tigers.
So, if you’re looking beyond the BRICs for real emerging market exposure, EMBB may not be the right ETF for you.
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