Emerging Markets Funds-Emerging Markets etf

Emerging Markets etf – Overview

There are some general features of exchange traded funds (etfs) that apply not only to emerging markets etf but to all etfs and you should be aware of these.

They are:
a Low cost index investment„„
Eligible for inclusion in self select ISAs and SIPPS„ „
Cost effective alternative to traditional mutual funds„

They have Stock exchange liquidity with low bid/offer spread„ „
The value of the ETF shares may be negatively affected by „ „market volatility and/or the volatility of the sub-fund’s assets and/or the underlying index
The sub-fund may be exposed to a derivative counterparty risk althought there is a maximum of 10% derivative „ „counterparty risk if the fund is UCITS III compliant.
There will be a trading difference between the ETF and relevant „ „index being traded due to the impact of annual management fees

The fund may be Certified as a distributing fund which has implications for the tax treatment of gains.

Emerging market etfs will track an emerging market index, perhaps something global like the MSCI emerging market index or an index which is restricted to a few economies eg BRIC (Brazil,Russia,India,China) or perhaps a single economy like China.

The choice of emerging markets etfs can be quite staggering as there are a number of providers available, eg:

Lyxor, db x-trackers, ishares, Powershares, Global X Management, etf Securities Ltd to name but a few.

Whichever company you choose, you should ensure that you understand the basis of the emerging markets etf you choose within that company, the associated risks, tracking errors, etc.

As an example of the type of emerging markets etf available just look at these from ishares

iShares FTSE BRIC 50, iShares FTSE/Xinhua China 25, iShares MSCI AC Far East ex-Japan, iShares MSCI AC Far East ex-Japan SmallCap, iShares MSCI Brazil, iShares MSCI Eastern Europe 10/40, iShares MSCI Emerging Markets.

You can see here that you have single country emerging markets etf, broad economy ones like eastern europe, limited number of economies like the BRIC, and global like the MSCI emerging markets etf.

Similar ranges will be available from the other providers which is why it is so important to understand the differences between the providers.

For instance, and by way of example only, db x-trackers has some of their funds which are fully collateralised with the collateral being 108% of NAV ( net asset value) of the emerging market funds. db x-trackers uses indirect/synthetic replication and the index tracking is outsourced rather than done in-house by a fund manager. What about the other companies?

How liquid are the particlular emerging market funds you want to invest in, what is the associated risk, which currencies can you invest in, and by that I don’t mean the currency of the emerging market, but whether a particular emerging markets etf is available in US dollars , euro or GB pound.

So all in all, before parting with your cash and investing in an emerging markets etf, there is quite a bit to think about.