With the bloom off the rose in emerging markets, two fund firms are tinkering with their strategies.
Guggenheim and Emerging Global, faced with distinct challenges with respective emerging market equities ETFs, in October will make changes to the indexes underlying each of those funds, a reflection of how developing market investments seem to be at a crossroads.
With its new index, the $218 million Guggenheim BRIC ETF (NYSEArca: EEB) will be adding global depositary receipts (GDRs), and with them, newfound access to Russia; while the $10.5 million EGShares Beyond BRICs ETF (NYSEArca: BBRC) will change to a FTSE index that integrates frontier-market holdings into the fund for the first time.
The index changes to EEB and BBRC come at a time when emerging markets asset prices have come under pressure for various reasons ranging from the slowdown in China, to middle-class unrest in places like Turkey and Brazil, to the prospect of normalizing borrowing rates in the U.S. With emerging markets out of favor and investors focusing on the U.S., it may be a perfect time for fund sponsors to make changes to funds they feel need tweaking.
“A lot is changing in the emerging markets,” said Dennis Hudachek, an ETF analyst at IndexUniverse, suggesting that perhaps now is as good a time as any to update strategies on funds that may be a bit out of step with the realities of modern emerging markets investing.
From BIC To BRIC
In the case of Guggenheim’s EEB, a first-to-market ETF that launched in September 2006, it never was a true BRIC fund to the extent that it lacked a substantial allocation to Russia, and the change this fall to the BNY Mellon BRIC Select DR Index addresses that shortcoming. It will abandon the BNY Mellon BRIC Select ADR Index at that time.
At the time of EEB’s launch, Russia was to some extent still living through the the difficult period of post-cowboy capitalism that flourished there in the 1990s in the immediate aftermath of the collapse of the Soviet Union.
Therefore, it was exceedingly difficult for U.S. investors to invest there, even using tools like GDRs, which are considered to be more liquid and that have holdings hewing more closely to U.S. standards in realms such as corporate governance, according to a Guggenheim official.
That’s no longer the case, as under President Vladimir Putin, the country has a newfound stability that has attracted the interest of U.S. investors, and the index change that allows for GDRs reflects that. The new index also still makes use of American depositary receipts (ADRs).
EEB will also, for the first time, be able to own Hong Kong-listed China H-Shares. The fund’s China exposure has featured GDRs exclusively since its inception. The fund is down 9.41 percent year-to-date through Aug. 27, accoring to IndexUniverse data.