You don't see a lot of exciting innovation in the ETF world anymore. The 1,580 existing exchange-traded funds seem to track everything under the sun. But issuers have launched a raft of intriguing new ETFs in the past few weeks.
Two that stand out: a long-needed China fund and an ETF that offers a lower-risk way to invest in emerging markets overall. Here's a look at what they have to offer.
The 'All China' ETF: db x-trackers Harvest MSCI All China Equity Fund (CN )
Last year, in Investors Still Seeking the Perfect China ETF , I argued that investors need an ETF that gives truly broad exposure to the Chinese market, rather than serving it up in dribs and drabs. The perfect China ETF would be 50 percent A-shares, shares of China-based companies that trade on Chinese exchanges and are generally available only to Chinese citizens. The other 50 percent would be in the shares of Chinese companies listed on Hong Kong and U.S exchanges.
CN looks like it could be that ETF. It tracks all share classes of large- and mid-cap Chinese stocks. It's an innovation beyond the current litter of China ETFs that require investors to choose between different slices of the market. China ETF investing is so complex that it’s the one area where people write entire “guides ” about how to do it.
A nice feature of CN is its 11 percent allocation to technology stocks, something often lacking in the more popular China ETFs. And it looks like the ETF will be able to include the next wave of Chinese tech companies listing in the U.S., such as Alibaba Group Holding Ltd. Many of the most popular China ETFs will never hold Alibaba, which makes no sense, since it could very well be the biggest tech IPO in history.
The timing for this ETF's launch isn’t great. China's slowing economic growth has led $1.1 billion in assets to drain out of China ETFs so far this year, and China ETFs have had negative returns. Short-term, this ETF won't set the world on fire, but in the long run it could be a player. The world of China ETFs is ripe for more competition. Over half of assets are in the $4.6 billion iShares China Large-Cap ETF (FXI ), which doesn't provide nearly the coverage that CN does. When the China story gets sunnier, this will be a good entry on the short list for investors with the risk appetite for single-country exposure.
The ETF's cost is 0.71 percent of assets on an annual basis. That's not bad, considering the coveted A-share exposure it gives investors and the fact that it's a single-country ETF, a class that tends to have higher expense ratios than less targeted funds. FXI's expense ratio is 0.74 percent.
Follow the Revenue: EGShares Blue Chip ETF (BCHP )
This ETF tracks companies in the developed world that have "quality, meaningful and growing revenue from emerging markets," according to the fund's prospectus. A look at the ETF's recent holdings shows that chunk of revenue ranging from 26 percent to 100 percent. This ETF gets investors exposure to emerging market consumer growth through bigger, less volatile developed market companies.
By contrast, some of the companies tracked by the big emerging markets ETFs are giant multinationals that get large portions of their revenue from developed markets. This ETF could lead a new wave of “economic exposure” ETFs that aren't interested in where a company is domiciled but rather in where its revenue comes from. MSCI and Russell have a whole slew of indexes that do this and are most likely going to have some ETFs tracking them in the future.
BCHP holds 30 companies and weights every stock equally. That means more exposure to smaller companies and more volatility than a market cap-weighted ETF. Equal weighting is a popular trend among "theme ETFs" because it can boost returns in a bull market, when smaller stocks tend to outperform larger ones. With the bull market now long in the tooth, that equal weighting strategy is important for investors to note. The 30 stocks in BCHP get an average of 47 percent of their revenue from emerging markets. Holdings include Colgate-Palmolive Co. (CL ) and Las Vegas Sands Corp. (LVS ).
The launch could be well timed -- emerging market ETFs have lost $6 billion this year and have been especially volatile and unsteady lately. This ETF offers a somewhat safer way to play those markets. It charges a fee of 0.60 percent, high for a regular ETF in this area but in the ballpark for a ‘smart beta ’ fund.
More stories by Eric Balchunas:
- Assets Pour Into a Curious and Controversial Investment
- Choosing 'All of the Above' in Your Income ETF
- Did Al Gore Invent ETFs, Too?
- Your New Financial Adviser: Radiohead
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