BRICs boost emerging-market ETFs

BRICs boost emerging-market ETFs

Emerging-market exchange-traded funds, or ETFs, are becoming increasingly specialized, attracting robust global inflows and interest, even as high specialization is highly risky.

A few developed-world ETFs have closed as they were thought to be too narrowly focused. Emerging-market ETFs appear to have measured their concentrations, taking into account the risks in becoming so narrowly focused that too many potential investors are left out.

The allure of ETFs lies in the immediate exposure to market trends, while also mitigating risk when venturing into unfamiliar asset classes, said J.P. Natkin, a managing director in emerging market sales at Credit Agricole Cheuvreux North America, Inc.

Last week, Barclays Global Investors' iShares launched the S&P Emerging Markets Infrastructure Index Fund, as "global infrastructure spending is set at $30 to $40 trillion in the next two decades," said Dina Ting, a principal at iShares Portfolio Management, who oversees $50 billion of assets for emerging markets and global real estate ETFs.

In early June, iShares launched the first dedicated Peruvian ETF, the MSCI All Peru Capped Index Fund (EPU). The fund started out with $2.5 million under management and, in less than a month, this has swelled to $22 million, Ting said.

Speaking at the New York Stock Exchange Monday after ringing the opening bell, Peruvian Finance Minister Luis Carranza said the fund will draw "enormous" liquidity to the local market soon.

Continuing to maintain that, iShares aims to account for the risk of over-specialization.

The first emerging-markets fund iShares launched was a dedicated Mexico fund in 1996. As of late June, the MSCI Mexico Investable Market Index Fund (EWW) had $550 million in assets.

ETFs have gained growing acceptance from institutional and retail investors, as people are placing a much higher premium on liquidity - a boon to often-volatile emerging-market investments.

In 2004, U.S.-based ETFs investing in emerging markets had a relatively small $4.7 billion under management. By June 30, 2008, that had ballooned to $69.7 billion, and to $78.5 billion in June 2009.

At the end of June, iShares broad-based emerging market fund captured $28.5 billion, while the iShares MSCI Brazil Index Fund (EWZ) has $8.6 billion in assets, capturing a large amount of total ETF market share.

The return on emerging-market ETFs for the year to date "has been slightly higher due to the number of BRIC-focused funds that performed exceptionally well," said Bradley Kay, ETF analyst for Morningstar in Chicago. BRIC refers to Brazil, Russia, India and China.

Along with Barclays, PowerShares, SPDR S&P, Vanguard and WisdomTree all have dedicated emerging-market ETFs. Some of the offerings include PowerShares Middle East and North Africa Frontier Countries and Vanguard Emerging Markets Stock ETF.

As a measure of growing popularity, trading volume in iShares emerging-market funds have grown 127% in the first half of 2009 over the same period last year, from 8.5 billion shares to 19.4 billion shares.

BRICs boost emerging-market ETFs