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By Jeremy Glaser | 11-16-2010 05:30 PM

Two Emerging-Markets ETF Picks

Morningstar's Timothy Strauts outlines two intriguing ways to access emerging markets.

Jeremy Glaser: For Morningstar.com I'm Jeremy Glaser. ETFs have opened up a world of possibilities for investors to get into finer, finer detail in global investing. I am here today with Tim Strauts, he is an ETF Analyst at Morningstar, take a close look at a few ETFs and take a look at international ETF investing in general.

Tim thanks for joining me today.

Timothy Strauts: Thank you.

Glaser: So, there has been a proliferation of international ETFs over the years, what are some things that investor should keep in mind, when they are evaluating if a fund is right for them?

Strauts: With the international ETF space, it has grown dramatically and initially you could pretty much only buy the broad market indexes out there, but now, you can buy slice and dice the market into single country funds and even sector single country funds now.

So, what investors have to be concerned about is some of these new products is, maintaining the diversification. Is that there are some ETFs out there are really focused on one particular area and you are really making more getting a single stock exposure, the fund may have 15% of its assets just in one stock. So, you have to be careful of kind of knowing what you are buying and look actually into the inside of what the fund actually owns.

Glaser: Know what you own is something that seems to come up a lot in ETF investing, know what's underlying it. Do you have any picks right now that look particularly interesting?

Strauts: First one would be WisdomTree Emerging Markets Local Debt. This is a relatively new fund, but actually has done quite well in the first few months it's been offered, has well over of $400 million in assets.

What's interesting about this fund is it is one of the first funds that gives you exposure to the local currency emerging market bonds, meaning it's as partially, you don't own U.S. dollar naming stuff, its in local currency. So, you are exposed to the foreign currency fluctuations. So, what has been the trend over the last few years, the dollar has been slowly dropping versus emerging currencies, which has been a nice tailwind on the returns because you've been getting that extra currency appreciation. Also, what's nice about Emerging Market Local Debt is that, in general, these countries are very good candidates to own, because they have good balance sheets and high GDP growth rates, definitely compared to the developed world.

Glaser: So, this fund might be more of a play on currencies and more of a play on credit risk or is it really the combination of the two?

Stratuts: You get the combination. Both factors can play equally into the returns.

Glaser: Do you have any other funds that you've been looking at recently?

Stratuts: Another one would be the WisdomTree Emerging Markets SmallCap Dividend, ticker symbol DGS. What's interesting about this fund is that, it's a play on the emerging markets but you get the small cap exposure which is really where the developing, where the local economy is focused.

Now, if you look at some one like the VWO or EEM, the major emerging market ETFs, what you get there is you get large multinational, a lot of oil companies, you get Samsung. A lot people would buy an emerging market, but maybe not thinking they want Samsung on their portfolio. But that's what you get with a large cap emerging markets fund. So, a small cap you get the local economy. The companies that are focused on the products and services, that are kind of geared towards this emerging middle class that growing in a lot of these countries.

Glaser: And now there is an income component to this fund as well?

Strauts: Yes. It also can be helpful as far as reducing some of the risk with emerging markets, is that it focuses on companies that are paying dividends. So, the dividend yield is right on 3.5% right now, which is quite nice in this current environment for low interest rates. So, you get a nice dividend yield and because the fund focuses on dividends, a lot of the countries that it owns are more fiscally responsible and more stable. It doesn't own a lot of Russia, countries like that where it has maybe a little more political instability.

Glaser: It's one of those cases where having the dividend really proves that they must have some cash on hand.

Strauts: Yes. You are not giving a Company that's just all talk, they actually show profits; they have money.

Glaser: Certainly an interesting way to take a look at emerging markets. Tim thanks for your picks today.

Strauts: Thank you.

Glaser: For Morningstar.com, I am Jeremy Glaser.

 

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