Emerging Market ETFs: Politics - Not Economics - Are The Real Threat

Emerging market ETFs staged a stunning rally yesterday and, while the jury is still out, investor interest in these fast-growing markets seems to be alive and kicking. The major themes driving this growth which has averaged well over 7% in annual terms over the past five years seem clear.

Market reforms and hospitality to foreign capital, better balance sheets and fiscal discipline leading to higher credit ratings and bulging FX reserves, urbanization leading to higher productivity, and the ability to catch up more rapidly due to breakthroughs in technology and communications. The world is truly filling in and moving tens of millions from poverty to the middle class. This is truly a wonderful development.

What could derail this locomotive? In my view, it won't be subprime lending or a liquidity crisis but rather politics. India's current ruling coalition is held together by alliances with factions at odds on just about every important issue including the Indo-US civil nuclear agreement, sealed last month in Washington after two years of grueling negotiations. This exposes the clear anti-Americanism of the government’s communist allies and the stark opportunism of the Hindu nationalist opposition.

In Thailand, the recently approved "new" constitution can be best described as "managed democracy" with a majority of the Senate to be appointed and a judiciary empowered to initiate legislation. In China, the ruling Communist mandarins are counting on continued strong economic growth to maintain power but if it falters only momentarily, it has only one card left to play and that is nationalism. You can feel traces of this in the government's response to some of the product safety issues that have surfaced as it charges that foreigners are trying to "demonize" China and Chinese products.

Protectionism and its kissing cousin nationalism are the issues that global ETF investors should watch very closely.

Global exchange-traded fund investors should not neglect the nice menu of emerging market ETFs that in some cases offer broader exposure than competitors such as the iShares family of ETFs. In particular, the China ETF (GXC) offers investors five times more companies in its ETF basket compared with the iShares China ETF (FXI). There is also a growing interest in the Emerging Europe ETF (GUR). The Chartwell ETF Advisor will begin blending some of these options in its seven model ETF portfolios.

Here is a snapshot of these emerging market ETFs sponsored by State Street Global Advisors [SSGA] based upon the S&P/Citigroup Global Equity.

• SPDR S&P Emerging Markets ETF (GMM) Index includes more than 1,500 companies across 26 emerging countries.

• SPDR S&P Emerging Latin America ETF (GML) Index includes companies domiciled in Argentina, Brazil, Chile, Columbia, Mexico, Peru, and Venezuela.

• SPDR S&P Emerging Middle East & Africa ETF (GAF) Index includes companies domiciled in Egypt, Israel, Jordan, Morocco, Nigeria, and South Africa.

• SPDR S&P Emerging Europe ETF (GUR) Index features companies in countries that are nearing acceptance into the EU, including Czech Republic, Hungary, Poland, Russia, and Turkey.

• SPDR S&P Emerging Asia Pacific ETF (GMF) Index includes companies domiciled in China, India, Indonesia, Malaysia, Pakistan, the Philippines, Taiwan, and Thailand.

• SPDR S&P China ETF (GXC) Underlying index includes over 150 companies domiciled in China.

Comments

[joeofclew]

so we are lookiing for the perfect ETF, the all-in-one portfolio, the whole rounder which plugs all holes and is immune to downturn in the global economy because of the sheer vastness and breadth of the different industries and their market capitalizations? doesn't sound like a task for a computer-model generated ETF but then again, if they have the data, just buy the first ETF you mention .... "SPDR S&P Emerging Markets ETF (GMM) Index includes more than 1,500 companies across 26 emerging countries.".... because it is what I just said?
how can they be evaluated for non-correlation?