Emerging Market Financial Sector ETF

If you have even a passing interest in exchange traded funds then you know that a company called Emerging Global Shares listed the first two emerging market sector ETFs with more to follow shortly.  The EGShares website has information for all twelve of its funds (eleven sector funds and one composite fund).

I thought it might be worthwhile to dissect the EG Shares Emerging Market Financial ETF that should have symbol EFN when it lists. The country breakdown favors China at 42% and Brazil at 22%. South Africa and India each have a little over 9% and then Malaysia, Turkey, Poland, Kuwait and Jordan each have low single digit weightings. Not surprisingly the largest stocks in the fund are a who’s who of big Chinese and Brazilian financial companies.

There is no Chilean exposure which is disappointing. I am aware of two NYSE listed Chilean banks (I own one) and they each have market caps in the single digit billions which would seem to be big enough. Also surprising is that Russia is nowhere to be found but that country does feature prominently in most of EGShares other funds. Additionally financials weigh in at 12% of the Market Vectors Russia ETF (NYSE: RSX) so there are some names available. I don’t necessarily want to own Russian banks, just noting that they are absent in this fund.

Other big markets missing include Taiwan and Malaysia. iShares Taiwan (NYSE: EWT) has 14% financials and iShares Malaysia (NYSE: EWM) has 28% in financials. It is not clear to me, liquidity and revenue screens notwithstanding, why the fund doesn’t spread it around a little more.

That this fund might have drawbacks is not unique because no investment product can be perfect. Furthermore whatever the drawbacks might be are not necessarily reasons to avoid a fund, often it is better to understand the drawbacks and figure out how to mitigate those drawbacks.

As far as the emerging market financial fund, given all that has gone on in the sector I think there is an argument to be made that an individual stock could be les risky than a fund. EFN is heavy in China as mentioned, in the past I have said I don’t really want my exposure to China to be financial stocks because modern banking is somewhat new to China (obviously the old pros have trouble with modern banking too) and I think it is more difficult to understand Chinese banks than other banks but of course that is a subjective opinion.

I have had better luck looking a few banks from other places in the emerging market space that have relatively few moving parts and a little less volatility than I think EFN will have. I’d rather add volatility in materials, energy and tech.

Some of the other funds from EGShares have a lot to offer in terms of what they can provide to a portfolio but I will pass on this one for now.

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