The revolving door to the ever-changing exchange-traded fund marketplace never stops turning. Introductions of emerging market ETFs seem at times to be offset by announcements of retiring ETFs that barely claimed their shares of the space.
Asset manager Emerging Global Advisors launched two funds in August of interest to emerging market investors. Its EGShares Emerging Markets Domestic Demand ETF (EMDD) focuses on emerging markets that have significant consumer demand. It allocates most heavily amongst countries to Mexico, with almost 25% of the portfolio, and the largest sector weighting is to telecommunications, at nearly 30%. Since its launch, EMDD has traded sporadically (not daily), averaging only 500 shares per day. The share price is nearly flat, down about 0.10% from its initial public offering value.
The other fund the firm launched in August is the EGShares Beyond BRICs ETF (BBRC), which tracks the performance of an emerging markets index that excludes companies domiciled in Brazil, Russia, India, and China. This ETF's top five country allocations are to South Africa, Mexico, Malaysia, Thailand, and Indonesia. Sector weightings are dominated by financials (34.2%), telecommunications (18.7%) and oil and gas (11.1%). BBRC has performed a little better than EMDD, trading nearly every day while averaging a touch more than 2,800 shares per day. The ETF is also down a small fraction from its IPO price.
But even as Emerging Global Advisors was launching its emerging market ETFs, other funds were leaving the industry. IndexIQ's IQ South Korea Small Cap ETF (SKOR) delisted and closed to new investors in August. Despite this setback, South Korea is an emerging market that can justify a small-cap offering in the future.
In addition, Direxion, an ETF producer that tends to focus on leveraged offerings, announced in August that it will close nine funds, four of which are emerging market ETFs: the Daily BRIC Bull 3X Shares (BRIL), the Daily BRIC Bear 3X Shares (BRIS), the Daily India Bear 3x Shares (INDZ), and the Daily Latin America Bear 3x Shares (LHB). These closures are somewhat understandable.
While it is difficult for IndexIQ to attract sufficient dollars and trading volume to keep a small-cap South Korean ETF alive, leveraged funds of all stripes tend to have lower volume. Leveraged ETFs are especially subject to closure because trading them effectively requires significant volume — and getting stuck in one of these emerging market ETFs can prove fatal. Appreciating the rapidity with which the prices of these funds can move generally requires first-hand experience. That volatility can benefit you as well as not, but it is the probability of great loss that causes many investors and traders to shy away from these products. Perhaps emerging market ETFs like these will one day be sustainable, but not many investors will mourn their loss today.
Given the global challenges to stimulate and maintain growth in developed and emerging markets, it is no surprise some funds just can't build an audience. But ETF manufacturers, like companies in most other industries, will continue to develop products-- including leveraged ones-- with new concepts and different ways to potentially profit from the latest trends. The emerging market ETFs that survive will presumably be those best adapted to conditions. But particularly for investors in emerging markets, liquidity is of paramount importance, and lack of it may well predict whether an ETF can establish itself or die.