Global X, the New York-based ETF issuer behind popular products focusing on equities of commodity producers and sector-specific China ETFs, announced today the latest additions to its ETF lineup. The Global X Russell Emerging Markets Value ETF (EMVX) and Global X Russell Emerging Markets Growth ETF (EMGX) will combine the concept of value and growth investment strategies with emerging markets exposure, becoming the first emerging markets ETFs to explicitly offer a style tilt. EMVX will seek to replicate the Russell Emerging Market MegaCap Value Index, while EMGX will be linked to the Russell Emerging Market MegaCap Growth Index.
Value and growth investing are certainly not new concepts, as investors have been bifurcating the domestic equity universe along these lines for decades. Generally growth stocks are those with high pricing multiples (such as price-to-earnings or price-to-sales) and low dividend yields, while those classified as value have higher dividend yields and lower multiples. Many investors believe that growth stocks perform well in certain environments (such as during economic recoveries) while value stocks are likely to maintain an advantage in others.
“We are pleased to be pairing with Russell Indexes, a recognized leader in the development of style indices, to bring these products to market,” said Bruno del Ama, CEO of Global X Funds. “Both new funds seek to provide investors with well-diversified portfolios by granting exposure to emerging markets while still following the tenets of classic investment philosophies: growth and value.” According to research from Russell Investments, through November 2010 the value index had outperformed the growth index over the last three years by about 10%. Over the past year, however, the growth index had outperformed the value index by 4.54%.
Value and growth strategies are quite common when it comes to U.S. equities; there are currently 37 ETFs in the Large Cap Value Equities ETFdb Category with more than $50 billion in aggregate assets, and countless funds that offer style-specific exposure to mid cap and small cap U.S. stocks as well. But few of the funds in the Emerging Markets ETFdb Category offer a tilt towards value or growth equities, though WisdomTree does already offer an Emerging Markets Equity Income Fund (DEM) and Emerging Markets SmallCap Dividend Fund (DGS). Both of those ETFs are linked to dividend-weighted indexes, utilizing a methodology that generally results in a tilt toward value stocks.
Under the Hoods
According to the EMGX fact sheet, the emerging markets growth ETF will hold about 142 individual stocks at launch. The largest components include Brazilian mining giant Vale (VALE), Taiwan Semiconductor (TSM) and Samsung Electronics (OTC:SSNLF). From a sector perspective, EMGX will have its heaviest allocation to financials - which may seem a bit strange for investors used to traditional growth and value splits among U.S. equities. For example, financials are the largest sector allocation in the iShares Russell 1000 Value Index Fund (IWD) at close to 28%, while making up just about 6% of the growth counterpart (IWF). But while banking is a mature industry in the U.S., ongoing demographic shifts in the emerging world have made the financial sector one of the fastest growing corners of the economy. After financials, technology also receives a sizable allocation (18%).
EMVX will have about 82 individual components according to the fund fact sheet, with the largest allocations going to PetroBras (PZE) and Gazprom. Not surprisingly, the energy sector makes up a huge chunk of the value fund, accounting for about 45% of assets at launch. Other heavy sector allocations include utilities (17%) and materials (11%).
The country allocation across the two emerging market style funds is very different. EMGX is tilted toward the “BIC” nations, with Brazil, India and China accounting for more than half of assets. EMVX is much heavier in Russia and South Korea; those two countries make up about 52% of assets, with Brazil and China accounting for another 35% in aggregate.
In the U.S. equity space, there are multiple approaches to value and growth investing, including more inclusive definitions and more “pure style” plays. The iShares S&P 500 Value Index Fund (IVE), for example, has 341 holdings, and its growth counterpart (IVW) has 327. Since both funds are subsets of the S&P 500, it doesn’t take a mathematician to conclude that there must be some overlap between the two. Rydex offers “pure value” and “pure growth” versions of the S&P 500 (RPV and RPG, respectively) that don’t overlap and focus only on the stocks that exhibit the strongest value and growth characteristics. Overlap between the new Global X products is seemingly minimal, although Samsung Electronics is one of the largest holdings of both EMGX and EMVX.
Disclosure: No positions at time of writing.
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