State Street Global Launches Its First Emerging Market ETFs

The rejuvenation of the State Street Global Advisors (SSgA) exchange-traded fund line-up continued last week, as the group added six emerging markets ETFs to its increasingly complete ETF line-up. The new funds are the first emerging market ETFs for SSgA, and include a number that either break new ground or challenge competitors on a cost basis.

The funds all listed on the American Stock Exchange. They are:

The funds track the relevant S&P/Citigroup Broad Market Index for their region. The indexes are market-cap weighted and adjusted for float. They include large- and small-cap companies alike.

The funds represent a major new challenge to Barclays Global Investors, which dominates the international ETF market and has the largest emerging markets ETF, the $14.7 billion MSCI Emerging Markets Index Fund (NYSE: EEM).

The new State Street funds do have significant differences from the iShares products, and indeed form other funds on the market, and it pays to examine them one-by-one.

The prospectus for all six funds is available here (pdf file).

Emerging Markets
The SPDR S&P Emerging Markets Fund (AMEX: GMM) will go head-to-head with the dominant EEM fund from BGI. The two funds have two major differences.

Most immediately, there is a difference in expense ratio: 0.60 percent for GMM versus 0.75 percent for EEM.

A more important difference, however, is how the funds handle South Korea. BGI’s fund tracks an index from MSCI, which considers South Korea an emerging market; as a result, South Korea is the largest country holding in EEM, making up 15.18 percent of the fund as of December 31, 2006. In contrast, the SPDR fund, GMM, tracks an index that considers South Korea a developed market; as a result, GMM has zero South Korea exposure.

With South Korea’s high-tech economy, this difference trickles down into everything from sector weightings to price-to-earnings ratios. EEM, for instance, has nearly 15 percent exposure to Information Technology, compared to just 7.75 percent for GMM.

Emerging Asia
The SPDR S&P Emerging Asia Pacific fund (AMEX: GMF) doesn’t really have any direct competition. There are plenty of Asian funds, most of which are dominated by Japan, and plenty of funds (like the iShares MSCI Asia Ex-Japan (AMEX: EPP)) that exclude Japan. But these ex-Japan funds tend to be dominated by Australia (it's 65 percent of EPP), and are not linked to the emerging side of this market.

GMF, in contrast, has big exposure to Taiwan (36 percent), China (31 percent), India (17 percent) and Malaysia (9 percent), and offers an interesting way to play Asian growth. The fund is dominated by Information Technology (26 percent) and Financials (21 percent).

SPDR S&P China ETF
The China fund (AMEX: GXC) probably enters the most competitive segment of the emerging markets ETF landscape, going head-to-head with funds from BGI (FTSE/Xinhua China 25 Index (NYSE: FXI) and PowerShares (Golden Dragon Halter US China (AMEX: PGJ).

The three funds, however, offer very different exposure. For one, PGJ only buys American Depository Receipts, while FXI and GXC focus on China/Hong Kong-listed shares. Moreover, there is a big difference in the number of securities: Both PGJ and FXI hold focused portfolios of 60 and 25 stocks, respectively, while GXC holds 120.

But the biggest difference comes in sector exposure, as shown below.

Clearly, an investor choosing between GXC and FXI is making an important choice in terms of sector representation; in the Utilities sector alone there is an 18 percent swing in exposure.

GXC and PGJ both charge 60 basis points; FXI charges 74.

SPDR S&P Emerging Europe (AMEX: GUR)
This fund might better be named the Russia energy fund, as the fund is dominated by Russia exposure (62.10 percent), and has a huge (49.8 percent) energy contingent. Two companies – Gazprom and Lukoil – together represent nearly 35 percent of the fund.

The fund doesn’t have any direct competition, although a pending Russia ETF from Van Eck Global would offer investors more targeted exposure to that hot and controversial market.

In addition to the Russia coverage, GUR includes exposure to Poland (13.6 percent), Turkey (10 percent), Hungary (6.3 percent) and the Czech Republic (4.3 percent).

An interesting and as-yet-unpursued fund strategy would be to select stocks from countries that have recently ascended to the European Union, allowing investors to capture the benefits of fiscal and other reforms that tend to go along with EU membership.

SPDR S&P Emerging Latin America (AMEX: GML)
This fund will compete with the iShares S&P Latin America 40 Fund (AMEX: ILF), a large-cap fund focused on the largest companies in Latin America. By contrast, the SPDR fund hold 94 components across a broader range of capitalization. It is, however, more expense: GML charges 60 basis points, while ILF charges just 50 basis points.

The funds have similar sector exposures, with GML slightly more exposed to Industrials and Consumer Discretionary stocks. On a country basis, both funds are dominated by Brazil (50 percent plus), and both have large weightings in Mexico (30 percent plus).

SPDR S&P Emerging Middle East & Africa (AMEX: GAF)
This is certainly the first regional Middle East/Africa ETF on the market, and perhaps the first Middle/East Africa fund ... period. Investors should take care to examine the details of the fund, however, as it might not line-up with their impressions of the "Middle East and Africa" region. The fund, for instance, does not provide much exposure to the energy-rich markets in the Middle East, which are largely off-limits to foreign investors; instead, the fund is dominated by South African and Israeli exposure. The country weights are shown below.

On the sector front, the fund is dominated by Financials (33.6 percent) and Materials (19.7 percent) .

The closest competitor is the iShares MSCI South Africa fund (AMEX: EZA), although its 70 basis point expense ratio starts to look pricey when you can achieve broader exposure for 60 basis points with GAF.