Investment in emerging markets have increased in recent years as
many have sought out these higher risk nations in a quest for above
average returns. Furthermore, these markets often offer up more in
terms of diversification, so many have looked abroad in order to
better spread out their portfolios as well (see Do Country ETFs
Really Provide Diversification?).
Yet these markets aren’t always golden as they are generally
characterized by a developing economy, inferior sovereign credit
rating (especially compared to developed markets), and relatively
high levels of unemployment. However, over the past decade as
developed market woes have built up, things have changed
dramatically.
With globalization, many emerging markets have become vital
contributors to the overall global economic growth picture. In
fact, the rising population and increasing per capita income in
these economies make them accountable for a bulk of global
consumption at this point in time (read Access the $30 trillion
Consumer Market with These ETFs).
However, investing in emerging markets demands a steady appetite
for risk as most of these nations are commodity centric economies
which makes them high susceptible to any downtrend in the global
economy.
Currency risk is also a factor that is omnipresent as far as
emerging market investments are concerned. The high inflation and
interest rates in the emerging markets, especially compared to the
developed market counterparts, creates pressure on the exchange
rates causing the emerging market currency to depreciate.
Thus, these investments can massively take a hit arising out of
currency fluctuations even if the underlying asset class generates
positive returns(see Currency Hedged ETFs: Top International
Picks?).
Still, their fairly liquid equity markets with low levels of
correlation with the developed country equity markets and typically
high yields (due to the high interest rate scenarios) make them
attractive destinations for aggressive, as well as income seeking,
investors.
With this backdrop, a look at the Zacks Top Ranked Emerging
Market ETF, the BLDRS Emerging Markets 50 ADR ETF
(ADRE), could well be of
interest to investors seeking basket exposure in this exciting
slice of the market that can hopefully mitigate some of the top
risks highlighted above:
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the
context of our outlook for the underlying industry, sector, region,
style box, or asset class. Our proprietary methodology also takes
into account the risk preferences of investors. ETFs are ranked on
a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also
receive one of three risk ratings, namely Low, Medium, or High.
The aim of our models is to select the best ETFs within each
risk category. We assign each ETF one of five ranks within each
risk bucket. Thus, the Zacks Rank reflects the expected return of
an ETF relative to other products with a similar level of risk.
For investors seeking to apply this methodology to their
portfolio in the emerging markets, we have taken a closer look at
the top ranked ADRE below:
BLDRS Emerging Markets 50 ADR ETF
(ADRE)
ADRE seeks to match the performance and yield of the Bank of New
York Mellon Emerging Markets 50 Index before fees and expenses. The
index includes American Depository Receipts of 50 companies from
the emerging market space.
Although all of its total assets are exposed to the
international equity markets, the ETF has successfully eliminated
exposure to currency risk by focusing on depository receipts which
are listed in the U.S markets and denominated in U.S. dollars.
Therefore, one of the biggest worries of emerging market
investing is mitigated. This coupled with a low expense ratio of 30
basis points clearly gives ADRE an upper hand over other options
available to investors for an emerging market exposure.
Naturally, the ETF has a strong correlation with the U.S. equity
markets as indicated by an R-Squared value of 79.58% versus the
S&P 500 index. Nevertheless, the ETF is known to exhibit less
vulnerability offering a low risk opportunity for investors as it
has an annualized standard deviation of just 24% which can be
considered low considering the volatile nature of emerging market
funds (see more in the Zacks ETF Center).
Also, the ETF has a decent asset base of about $317 million and
does a daily volume of around 41,500 shares. The ETF is currently
trading at attractive valuations of 1.59x its trailing twelve month
book value and 11.96x its trailing twelve months earnings, so it
could be a value choice as well.
From a sector viewpoint, ADRE relies heavily on a few sectors,
with Energy (22.26%), Telecommunication Services (19%) and
Financials (17.33%) being allotted the most exposure.
From an individual holdings point of view, the fund does well in
allocating just around 46% of its total assets in top 10 holdings
and holds 50 securities in total. The ETF prioritizes its bets
across the bigger emerging market economies like Brazil (31.40%),
China (19.29%) and Mexico (9.22%).
The ETF has been somewhat weak for the trailing one year period,
primarily because of its heavy focus on Brazilian large cap
equities which have clearly underperformed within the time frame in
question (read Time to Worry about Brazil ETFs?).
However, the fund has a solid yield of 2.59% and could make for
an interesting choice due to its low risk nature. ADRE currently
has a Zacks Rank of 1 or ‘Strong Buy’ suggesting that our system is
looking for outperformance ahead for this product.
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BLDRS-EMER MKTS (ADRE): ETF Research Reports
CHINA MOBLE-ADR (CHL): Free Stock Analysis Report
TAIWAN SEMI-ADR (TSM): Free Stock Analysis Report
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