The Claymore/BNY BRIC ETF (EEB) boasts one of the highest-quality portfolios in its peer group but also courts manifold risks. That's the underlying message of Morningstar's recently released analysis by Emiko Kurotsu, reported by Jeffrey Ptak.
EEB tracks roughly 90 ADRs and GDRs from the BRIC economies, with large stakes in stocks such as the fully-valued China Mobile (CHL), commodity-sensitive Petrobas (PBR) and banks: Bank Bradesco (BBD), ICICI (IBN) and Itau (ITU). Its trailing one-year return through Jan. 31, 2008, topped all diversified emerging-markets funds, Ptak reported. It returned 67.3% in 2007, backed by a currency tailwind. However Morningstar recommends trading in EEB only when it's at a 20% of greater discount to what it considers fair value - $49.31 - due to potential changes that could impact on some of the holdings. (Russia's Mobile TeleSystems (MBT), for example, is considered a "speculative risk" by Kurotsu, citing the Russian government's past disregard for foreign property and shareholder rights).
Morningstar recognizes that EEB is an inexpensive way to gain access to some of the largest firms in the BRIC economies, and notes that it has been a standout performer. Furthermore:
The portfolio's quality is higher than its peers, with wide- and narrow-moat stocks accounting for the bulk of assets. That burnishes the portfolio's overall intrinsic worth, as higher-quality firms like these are more valuable than their less-established counterparts.
However, Ptak notes that the bears would say:
* This isn't the cheapest diversified emerging-markets ETF around. Vanguard Emerging Markets ETF (VWO), for instance, is better diversified and comes at half this fund's price.
* Given the fund's focus on just four countries, the portfolio doesn't benefit from regional diversification as much as peers.
* The fund's big stake in energy- and metals-related firms has made it very volatile.
* Many of this fund's holdings have intertwined relationships with their host government, meaning foreign shareholder interests can take a back seat when state interests come into play.