Emerging Markets ETF

By: EconomyWatch   Date: 31 July 2009

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Emerging Markets ETF is an investment option that lets the investor exploit the prospects of emerging economies. This lets the investors to invest indirectly in a country and generate profit in turn.

 

The main attractions of investing in emerging economies are:

  • Inexpensive labor

  • Good cash flow

  • Potential for growth

  • Ability to sustain even in difficult times

  • Willing work force

 

How does an Emerging Markets ETF work?

A sponsor, mainly a huge bank or a big financial institution, creates a plan of an investment scheme to test its attraction value. If the reception to such a scheme is good, the bank purchases the necessary stocks. However, that may differ from industries to regions, and sectors. Once the portfolio is completely bought, it is deposited with a trustee. The trustee issues ETF certificates which are later marketed. The value of the stock is priced slightly higher than the real value for profits.

 

Popular Emerging Markets ETF

 

Emerging market ETFs that invest in a wide range of regions and across industries often reap more profits than others. Some popular emerging market ETFs are:

  • Shares MSCI Emerging markets Index Fund (EEM): This ETF strives to replicate the results of publicly traded securities in the emerging markets around the world as tracked by the MSCI Emerging Markets Index.

  • SPDR S&P Emerging Markets ETF (GMM): This ETF tries to replicate the returns and the performance of the S&P/ Citigroup BMI Emerging Markets Index.

  • BLDRS Emerging Markets 50 ADR Index ETF (ADRE): This ETF tries to replicate the publicly traded depositary receipts comprising The Bank of New York Emerging Markets 50 ADR Index.  

Emerging Markets ETF: Advantages
 

There are many advantages to these ETFs besides hedging like:

  • Foreign markets and the local markets do not behave similarly all the time. Therefore, when one economy does not do well, the losses can be neutralized.

  • When the emerging economies perform well, the ETFs’ value increases. Brazil and South Korea are two good examples.

 

Emerging Markets ETF: Disadvantages

 

The disadvantages of these ETFs are:

  • In difficult times like recession, the decreased money flow can limit the growth of emerging market, and thus impact the value of the ETF.

  • If the ETF has markets that are dependent on each other or on a common market, then a slight disturbance in one market can create turbulence else where.

 

Even with all these disadvantages, the traders have invested in the emerging markets ETFs due to their promising returns and continue to do so.

 

 


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