Emerging market ETF player, Emerging Global Advisors ("EGA"), has decided to cease trading two of its EGShares products on November 2, 2015. The closures reflect a lack of interest in these funds as they represent less than 2% of EGA's assets. The two EGShares ETFs serve divergent interests and have failed to live up to their investors' expectations. Let's examine the underlying reasons for their underperformance:
EGShares Brazil Infrastructure ETF (BRXX)
BRXX tracks the FTSE Brazil Infrastructure Extended Index focusing on 30 companies that FTSE deems to be representative of infrastructure industries in Brazil. The fund has been overlooked by investors as it has garnered only $8.6 million in assets since its inception in February 2010.
Almost all Brazil ETFs have been beaten down lately due to the country's troubling economy, which is now in a technical recession due to falling GDP, higher inflation and huge public deficit. The economy contracted 1.9% in the second quarter following a 0.7% decline in the first. This marks the worst slowdown for Brazil in nearly three decades (read: Global X to Close These 4 ETFs).
The majority of the railroad and port building projects in Brazil are tied to growth in the country's oil and mining industry. These infrastructure projects have come to a halt due to plunging oil prices affecting its oil industry and dampening demand for iron ore led by economic slowdown in China. Brazil is the world's second-largest producer of iron ore and China is the major market for it.
These factors have led investors to stay away from this fund. BRXX dropped 47.1% so far this year and lost about 76% in the last five years (as of October 1, 2015) (read: S&P Downgrades Brazil to Junk: ETFs in Focus).
EGShares Blue Chip ETF (BCHP)
Emerging markets have been out of investors' favor over the past several months piling up heavy losses. BCHP follows the equally weighted 30 stock EGAI Developed Markets Blue Chip EM Access Index focusing on companies that generate revenues from emerging markets. The fund is almost neglected gathering a meager $4.3 million in assets since its inception in April last year.
Domestic strength in the U.S. raising the possibility of a Fed rate hike, lower commodity prices and economic turmoil in China have resulted in a massive sell-off in emerging market stocks in the past few months. This made the fund an unpopular choice among investors. It was down 7.8% in the past one year.
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