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M*: 3 Choices For Those Expecting An Emerging-Markets Rebound
Quoting Kevin Carter of Big Tree Capital - what to do with broad emerging market ETFS?
Carter: Avoid them. I have come to the conclusion that the largest emerging market ETFs (EEM & VWO) have significant structural flaws and are not optimal ways to get exposure to emerging markets.
That conclusion is only being strengthened by the collapse of oil and natural resource prices. The biggest problem with these ETFs is the large allocation to state-owned enterprises, which account for about 30% of EEM and VWO.
These are massive, legacy, government-owned Chinese banks, Brazilian oil companies, etc., that are inefficient, conflicted and frequently corrupt. Just look at Petrobras in Brazil. If you read the newspaper, you know that the country is reeling, as dozens of Brazil’s government officials and business leaders stand accused of looting billions of dollars from Petrobras through a string of kickbacks and bribes.
The other big problem is that VWO does not own companies like Alibaba and Baidu, because these companies list in the U.S. and are thus not included in the FTSE Emerging Markets index.
It seems crazy that these companies choose to list on the most transparent markets with the highest listing standards, but get “punished” from an index perspective for that decision.
Of the 48 companies in EMQQ, only two are included in VWO. Just think about that. Petrobras is in VWO in multiple places (local listing, ADR, preferred), while Alibaba and Baidu aren’t.
None of the above for me. I like WAEMX, WAFMX, SFGIX, DRESX, NWFFX. Too many inefficiencies in EMs for me to use an index fund that owns more than 3,000 positions.
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