Skip to main content

The Globe and Mail

Be wary of what lurks in emerging-market materials ETFs

Striking miners chant slogans as they gather at the AngloGold Ashanti mine in Carletonville, northwest of Johannesburg October 24, 2012. AngloGold Ashanti said on Wednesday third-quarter fell below its previous guidance to 1.03 million ounces following strikes at its mines. The company had said it expected production of 1.07 million ounces to 1.10 million ounces for the quarter. The bullion producer on Wednesday fired 12,000 strikers for ignoring a deadline to return to work. REUTERS/Siphiwe Sibeko (SOUTH AFRICA - Tags: CIVIL UNREST BUSINESS POLITICS ENERGY)


After a disappointing 2011 and a poor start in 2012, emerging-market equities started showing signs of improved performance late last year. Now many investors are hoping these stocks will go on a run like they did in the last decade, when they dramatically outperformed domestic equities.

A big part of the emerging-market story lies in the materials sector, as an ascendant middle class demands and consumes more natural resources. Many emerging-market countries have local materials companies that have benefited from this effect in the past and can in the future as well. Not surprisingly, there are exchange-traded funds that offer access to the space.

Although neither fund has much volume, investors wanting narrow access to emerging-market materials could consider the EG Shares Basic Materials ETF or the iShares MSCI Emerging Markets Materials ETF. There are similarities between the two; the largest holding in both funds is Vale, which makes up 9.3 per cent of LGEM and 13.6 per cent of EMMT. Anglo Gold Ashanti also features prominently in both funds.

Story continues below advertisement

From there, however, there is not much overlap. That's because the two funds have differences at the country level. LGEM is heaviest in South Africa, which accounts for 21 per cent of holdings, followed by China with 17 per cent, Brazil with 16 per cent and Russia with 15 per cent.

Like many EG Shares funds, LGEM is very BRICS-centric. It also has a 9 per cent weighting in India. EMMT allocates 19 per cent to Brazil, 13 per cent to South Africa, 12 per cent to Mexico and, a little further down the list, 8 per cent to South Korea, which is a result of the 8 per cent weighting in POSCO.

Consistent with the BRICS focus, LGEM only covers nine countries, while EMMT covers 15. LGEM also has far fewer individual holdings than EMMT: 30 vs. 63.

Other nuts and bolts: LGEM has a 0.85 per cent expense ratio compared to 0.69 per cent for EMMT. The funds have trailing yields of 4.06 per cent and 2.61 per cent, respectively, but it is always worth mentioning that the dividends paid by ETFs can fluctuate from year to year.

For the trailing 12 months, EMMT has dramatically outperformed LGEM, 10.09 per cent to 3.08 per cent. Much of the difference is because of LGEM's greater exposure to South Africa. During the summer of 2012 there were countless news stories of mine strikes in South Africa and violence between police and striking miners. This weighed very heavily on South African miners like Anglo Gold Ashanti, which is a much larger holding in EMMT and is down 33 per cent in the last year.

This illustrates the need to look under the hood and understand the constituent differences between seemingly similar funds. If Chinese markets have a resurgence in 2013 as some are predicting, then it stands to reason that LGEM will be the one to outperform going forward.

The issues of low volume and low assets in each fund are worth mentioning. Low volume does not mean poor liquidity. If market makers are able to provide executions, then the liquidity is adequate. Anyone interested in either fund needs to be patient and use limit orders.

Story continues below advertisement

Low assets always raise the possibility of a fund closure. Predicting whether a fund will close or not isn't as important as making sure you sell out of a fund that announces it is closing. There can be expenses in closing the fund, and anyone holding the fund through the closure would be on the hook for sharing in the expense.

At the time of publication, VALE was a client holding.

Follow @randomroger

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Report an error Editorial code of conduct
As of December 20, 2017, we have temporarily removed commenting from our articles. We hope to have this resolved by the end of January 2018. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to If you want to write a letter to the editor, please forward to