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3 ETFs for Emerging Europe, Middle East and Africa

LOW COST FUNDS: Do you want to tap into the niche growth stories within the emerging economies across the globe? These passive funds offer exposure to three growth areas

Emma Wall 15 July, 2015 | 11:58AM

This article is part of the Morningstar's Guide to Emerging Market Investing. Click here to find out just what an emerging market is and which regions hold the potential to boost your investment portfolio. 



Emma Wall: Hello, and welcome to the Morningstar Series 'Ask the Expert'. I am Emma Wall and I am joined today by Morningstar's Passive Fund Analyst, Kenneth Lamont.

Hi, Kenneth.

Kenneth Lamont: Hello, Emma.

Wall: So today, we are in day three of our Emerging Markets Special Report Week and we are focusing on Emerging Europe, Middle East and Africa. The reason why we're drilling down a bit during this week is because in the past, emerging markets rather have moved, kind of, one as one, but they are increasingly divergent and the things which drive one region can be good for one region or bad for another.

For example, the oil price has fallen significantly in the last 12 months and that's been negative for Russia, but actually very positive for some Asian countries. I thought we'd start by talking quickly about why ETF's the great for gaining access to emerging markets.

Lamont: They allow investors to reap the benefits of passive investing across the board and that is a cheap, efficient market access to a specific geographical segment or sector.

Wall: One thing that we should be careful of when we talk about these sort of more specific, more niche ETFs is they should only make up a very small part of your portfolio and if you're not happy doing this sort of regional blend yourself, it may be better to go to a wider emerging market ETF, or indeed, active fund if that's what you'd like to do, but with that caveat in mind, what ETF do you think is best placed to gain exposure to the emerging Europe story?

Lamont: The one we like is the SPDR MSCI Emerging Markets ETF. It's got a TER of only 55 basis points which is remarkably low when you compare it to active managers in the space. One thing that investors should be aware of when investing in this fund is that around 50% of the geographical exposure is to Russia.

Wall: That may not have been any bad thing though this year, because Russia has done extremely well, although of the back of earlier, previously when it did very poorly, but if you are confident about gaining e exposure in Russia, you feel strongly that you won't have exposure, that's a very efficient way to do it.

Lamont: It certainly is and this particular geographic exposure also includes about 20% to Poland and 20% to Turkey. So as far as indexes go, it's got a fairly concentrated geographic focus.

Wall: What about if you want to gain exposure to the Middle East and that the second region that we're looking at today, a region which includes Qatar, and of course, United Emirates which last year were upgraded by MSCI from frontier markets to emerging markets, therefore sort of broadening the appeal to people, perhaps who are more cautious when it comes to investing. What would you say is the best ETF to gain exposure to that market?

Lamont: Again, one we like is the db X-trackers MSCI GCC Select ETF. This gives fairly broad exposure to the Middle Eastern region, but again, as with the previous ETF, there is a strong regional sort of geographic bias towards Saudi Arabia in this case, which has almost two-thirds of weighting within the index.

Wall: Saudi Arabia very recently has just opened itself up more into foreign investment, although there are some restrictions I think, and the foreign investors can only earn up to 5% in any one country and one company rather, but of course, foreign investment is a good thing for the stock market, because new money invariably means a rally in the stock market.

One thing I think investors should be wary about with that region is it is quite concentrated in the types of stocks that they hold. It's a lot of energy and commodity stocks. Moving on then to Africa, the final region that we're looking at today, what ETF do you think is best placed to gain access there?

Lamont: Again, in this case, we like db X-trackers fund and this is the MSCI EFM Africa Top 50 ETF and this selects the top 50 stocks from Africa, and again, like both the previous ETFs, there is a strong geographical bias to South Africa in this case, which has around 55% weighting in the index. When you're looking at these funds and specifically the two db X-trackers funds, you'd expecting a tracking difference of around 1% over the year which means that you can expect your ETF to lag the index by about 1%.

Wall: But when the stock market is rallying that still means it's going up and Africa has a really strong growth forecast for this year. It's about 4.5%, which is more than double what we're getting in developed markets and although we – as you said, we should bear in mind that an Africa ETF is very heavy weighted with South African stocks. South African stocks do get their revenues from the broader region. So, you're really buying into a bigger story than just the one country, aren't you?

Lamont: Certainly, certainly and again Nigeria takes over 20% of this particular index. So, again, you have exposure there to the price of oil as well.

Wall: Kenneth, thank you very much.

Lamont: Thank you, Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
X MSCI Africa Top 50 Swap ETF 1C7.86 USD0.14
X MSCI GCC Select Swap ETF 1C17.22 USD2.73

About Author

Emma Wall  is former Senior International Editor for Morningstar

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