Global ETFs Offer Investors A Play On Emerging Markets (BKF, BIK)

2011 has not been  kind to global equity markets.  Following a respectable start which saw many global ETFs reaching their highs in April and May, the bottom began to fall out of the market, with the fall in emerging markets, including the BRIC nations – Brazil, Russia, India, and China – being the most noxious.

In what has proven to be a precarious year for investors, even strong European economies such as Germany have seen their market sink.  The picture isn’t pretty in other parts of the developed world either, with the US combating stubbornly high unemployment, and Japan’s debt levels approaching 200% of GDP, raising red flags around a market that has been lagging for the better part of two decades.

It has been increasingly clear, however, that emerging markets are the new drivers of the global economy, with developed markets along for the ride.  Many investors believe that while the “growth gap” has widened, the “risk gap” between emerging markets and developed markets has contracted.

These economies have experienced growth due to their long-term, sustainable demographic shifts, and many emerging markets enjoy relatively healthy balance sheets.  For investors who are looking to ride the next bounce, the goods news is that these once-stellar emerging markets could provide opportunities to play a rebound in the battered global ETF market.

Global ETFs For Investing In BRIC Economies

For investors looking beyond US borders for new investment opportunities, the BRIC economies have proven to be the most popular.  These four largest emerging market countries currently comprise 40% of the world’s population, and 15% of GDP, thereby ensuring that they will be a major world player for years to come.

In addition, the combined foreign reserves total over $3.1 trillion, which could potentially allow these countries to influence world trade as well as reshape global politics.  While it has historically been challenging for American investors to access BRIC equity markets directly, the rise of global ETFs has given investors the opportunity to access the equity markets of all four counties in one low cost fund.


Currently, there are global ETFs that follow the BRIC region, the SPDR S&P BRIC 40 (BIK), as well as iShares MSCI BRIC Index Fund (BKF).  Although these funds track the same countries that make up the BRIC economies, their weightings are very different.

There is a significant variation in the weighting given to each country, with BIK weighted more heavily toward Russia, and BKF holding twice as much in India as BIK.  This provides investors with options, as some investors  may want to avoid Russia and India, while those who would like a more balanced approach may prefer the holdings in BKF.


Choosing The Global ETFs That Are Right For You

With similar expense ratios, and comparable year-to-date returns despite variances in country allocations, the major differences between these global ETFs are in dividend yields as well as the concentration of funds within specific sectors.

Many global ETFs offer investors exposure to the largest companies listed in a given country or group of countries, including ETFs that focus on emerging markets.  This strategy can lead to sector biases as large-caps are generally tilted toward oil companies and financial institutions, and this method can serve to weaken the connection between the performance of the fund and the local economy.

While large-cap and mega-cap companies tend to be multi-national corporations with cash flow generated from markets the world over rather than solely within the country where the stock is primarily listed,  ETFs that focuses on small-cap securities are more often impacted by the local economy’s health as well as domestic consumption.

For these reasons, a small-cap emerging market ETF such as the BRF could be a better “pure play” on emerging markets.  It is important to remember that exposure to mega-cap emerging-market ETFs is not typically a bad thing, and investors should consider an allocation to these types of securities for their long-term investment strategy.  Investors should consider the market-cap breakdown for their emerging market allocations, and choose global ETFs accordingly.