Exploring Allocations In Emerging Market ETFs

Exploring Allocations In Emerging Market ETFs

With the S&P 500 now in a bear market, many investors are looking toward emerging markets for the potential for growth and outsized returns.  

With the S&P 500 dancing around a bear market, many investors are looking toward emerging markets for the potential for growth and outsized returns.  

But much has changed in the emerging lands, and investors should look no further than Russia to understand the risk and upheaval that come with investing overseas.  

Using the iShares MSCI Emerging Markets ETF (EEM) as a standard-bearer, there has been significant change in this and other emerging market ETFs, much of it related to the conflict in Ukraine.  

iShares even posted a notice on its EEM page: “As of the end of February, Russian securities accounted for less than 0.01% of our clients’ assets, mostly in our index portfolios, which seek to track indexes that have, or until recently had, Russian investment exposure.” 

For investors with enough history behind their investment activities, this is significant. Not too long ago, “emerging markets” investing often meant investing in the BRIC countries: Brazil, Russia, India and China. It was adventurous and promising to add the BRICs to your portfolio. Emerging market investing expanded to include many more, and much smaller, markets than BRICs. But as of this year, the “R” is gone; the BRICs are now the BICs.  

Pulling most of the exposure in a portfolio out of Russia makes sense in the present climate. But investors who own EEM or any other ETF or mutual fund that once promised exposure to emerging markets, or the BRICs in particular, should be aware of the changes. Where will all the money be reallocated that is being withdrawn from Russia, and where will all the new money be invested if not in Russia? 

Thus far, EEM has fully eliminated its exposure to Russia. According to its geographic breakdown, China represents 33.12% of its portfolio. Knowing what’s happening in China currently makes a significant exposure to China likely to increase volatility in the price of all investments holding assets there.  

Furthermore, while one might assume EEM is now a “BIC” ETF, that would be wrong. In fact, Brazil, India and China only represent 40.7% of the portfolio as of June. Even the term “BIC” wouldn’t apply if it was real, because Brazil only accounts for 5.04% of the portfolio. Taiwan is second, at 15.41%; India is next, with 12.54%; South Korea accounts for 12.07%, with Brazil next, followed by Saudi Arabia, South Africa, Mexico, Thailand, Indonesia, Malaysia and the United Arab Emirates all with percentage allocations of less than 5%. 

This is clearly not your father’s emerging market fund.  

The fact that the top two geographic allocations are China and Taiwan is important. Any worsening relations between the two countries would significantly change the risk assessment of this allocation. As it stands, this is important to know, with China and Taiwan accounting for nearly half of the portfolio. 

The one-year total return is -13.03%, while the three-year average total return is 3.84% and the five-year and 10-year averages are 5.06% and 2.61%, respectively. Since inception on April 7, 2003, the fund has returned 9.54%. 

There are a plethora of global investments at investors’ disposal, but making sure the fund is giving exposure specifically where and in the amount investors want is paramount. As mentioned earlier, approximately 49% of EEM is in China and Taiwan, so doing the homework is key to making sure the portfolio is not taking on too much risk. 

Correction: An earlier version of this story incorrectly stated the holdings of EEM in China and Taiwan constituted 40% of the fund. Those countries account for approximately 49% of the fund's total assets.