Analyse: CS ETF (Lux) on MSCI Emerging Markets

Wette auf ein Comeback der Schwellenländer. Dieser nach Marktkapitalisierung gewichteter ETF verwendet aktuell das optimierte Sampling-Verfahren. 

Alastair Kellett 05.10.2012
Facebook Twitter LinkedIn

Rolle im Portfolio

The CS ETF (Lux) on MSCI Emerging Markets provides exposure to a wide array of mid- and large-cap companies within the world’s emerging regions. This broad category of countries has seen its importance on the global stage rise dramatically in recent years. Whereas this type of exposure would once have been considered only as a speculative tactical tool, it is increasingly becoming a core component of a globally balanced portfolio. That said, this can be a volatile area of the market. The MSCI Emerging Markets Index has had annual standard deviation of almost 20% for the past 10 years. Its correlation to other equity exposures does suggest some benefit as a diversifier. Over the same period it has shown correlation to the local-currency returns of the S&P 500, the MSCI Europe, and the broader MSCI World Index of 77%, 78%, and 83%, respectively. Some of that benefit, however, has shrunk in recent years. The corresponding five-year correlations are 84%, 86%, and 88%. The fund does not distribute any of the dividends paid by its underlying constituents, instead reinvesting them immediately to maintain full exposure. Therefore, this product may not suit an investor looking for regular investment income.

Fundamentale Analyse

As economic growth in the developed world has slowed down amidst consumer and government deleveraging, much of the developing world has continued to exhibit strong growth. As the group’s largest economy, and the biggest weighting in the index, China will have a considerable impact on the fortunes of the MSCI Emerging Markets Index. In June 2012 the People’s Bank of China cut interest rates by 25 basis points, the first rate cut in the country since December 2008, when the world was in the throes of the global financial crisis. Less than a month later, it cut rates again. Since July it has been on hold as it balances the need for growth with the desire to keep a potential housing bubble under control. The monetary easing of the summer represented a stark departure, coming after a couple of years of policy tightening, including rules designed to curb home-buying. All of the back-and-forth in policy signalling highlights the delicate juncture of the country’s economy. China’s GDP grew at an annualised rate of 7.4% in the second quarter; robust on an absolute basis but less than had become customary. The Chinese government earlier this year targeted a 7.5% growth rate for all of 2012. Politically, China is in flux. This autumn the ruling Communist Party will appoint a new leader in a once-in-a-decade transfer of power. Adding to the suspense, the main candidate for the job, Xi Jinping, vanished from public view on September 1st, only to reappear two weeks later with little explanation for the absence. At the same time, the country finds itself caught up in maritime disputes with Japan over control of some uninhabited islands. The spat has led to anti-Japan riots in Chinese cities. South Korea has grown dramatically in the past few decades. According to The Economist, it now boasts a GDP per head that is higher than the European Union average. A number of very large conglomerates, chaebol, have been tremendously successful – witness the rise of such familiar names as Samsung, LG, and Hyundai – but corporate governance concerns have dogged them as a result of their family-run structure. South Korea also finds itself drawn into the maritime disputes with Japan and China, threatening trade in the region. A key driver of growth for the Brazilian economy is energy. The country’s wealth of natural resources has made it a substantial beneficiary of the past decade’s trend towards higher commodity prices. A big part of that trend has been the rapid growth of China, with its seemingly insatiable appetite for raw materials, as well as Malthusian concerns about the world running out of non-renewable resources. The concern right now is that with China slowing down and other parts of the world in recession, the demand for raw materials could fall considerably. Further muddying the picture is the rapid pace of new natural gas discoveries throughout the world, particularly in the United States. Over the last 10 years, the MSCI Emerging Markets Index has produced an annual return of 14.73%, versus 6.39% for the MSCI World Index, which covers only developed market equities. Its price-to-earnings ratio was 9.7 at the end of August, up from its low of 7.1 in May 2009, but still comfortably below its five year average level of 12.2.


The MSCI Emerging Markets Index is a free float market capitalisation-weighted index covering 21 emerging market countries from all over the world. It currently has 820 large- and mid-cap constituents and covers approximately 84% of the free float-adjusted market capitalisation of the component countries. The index is reviewed quarterly, with size cut-offs recalculated semi-annually. The universe is initially screened for liquidity, as measured by the value and frequency of trading. The median constituent has a market capitalisation of $2.0 billion. At the end of August, the top geographic exposures were China, South Korea, and Brazil, with respective weights of 17.3%, 15.4%, and 13.2%, followed by Taiwan at 11.0% and South Africa at 8.0%. On a sector basis the index is broadly diversified. The top weight is Financials, making up 24.9% of the total, followed by Information Technology at 13.7%, Energy at 12.9%, Materials at 11.7%, and Consumer Staples at 8.6%. The index is not very concentrated, with just 16.1% in the top 10 names.


The fund currently uses optimised sampling to try to capture the performance of its benchmark, holding a physical basket of securities designed to match the characteristics of the underlying index but not the exact stocks in the exact weights. Compared to the index’s 820 constituents, the fund holds 300. The fund is domiciled in Luxembourg and uses the U.S. dollar as its base currency. It is ISA eligible and has UK reporting status. The fund’s prospectus gives Credit Suisse the flexibility to change the fund’s replication method, to stratified sampling or synthetic, or any combination of the three, according to its discretion. In the case that the fund used swaps for synthetic replication, the counterparty would normally be a member of the Credit Suisse group. Swaps could be funded or unfunded, with the substitute basket or collateral held by the fund’s custodian and marked to market on a daily basis. Dividends paid to the fund by its underlying holdings are immediately reinvested, rather than being distributed to the fund’s investors. This should reduce the cash drag that can result from accumulating dividends. The fund does engage in securities lending. According to Credit Suisse, the loans are collateralised to at least 100% of their value every day, and usually to a level of 102% to 105%. In the twelve months through the end of December, an average of 2.1% of the portfolio was out on loan, and in total the activity added 1.8 basis points to the fund’s net return.


The fund has a total expense ratio (TER) of 0.68%, which is middling in relation to other funds that provide similar exposure. Other costs potentially borne by the unitholder but not included in the total expense ratio include bid-ask spreads on the ETF, securities lending fees, transaction costs on the infrequent occasions when the underlying holdings change, and brokerage fees when buy and sell orders are placed for ETF shares. Income generated from securities lending could potentially recoup some of the total costs.


For broad exposure to emerging markets there are many choices out there. These include UBS-ETF MSCI Emerging Markets, Amundi ETF MSCI Emerging Markets, SPDR MSCI Emerging Markets, ComStage ETF MSCI Emerging Markets TRN, Lyxor ETF MSCI Emerging Markets, db x-trackers MSCI Emerging Markets TRN, iShares MSCI Emerging Markets, ETFlab MSCI Emerging Markets, and HSBC MSCI Emerging Markets. For alternatives to market capitalisation-weighted exposures, there are Ossiam ETF Emerging Markets Minimum Variance and PowerShares FTSE RAFI Emerging Markets ETF. Of all of these, the largest are the iShares and the db x-trackers funds, with assets of $6.3 billion and $3.6 billion respectively. The fund with the lowest TER is the Amundi product, with a TER of 0.45%.


Facebook Twitter LinkedIn

Über den Autor

Alastair Kellett  Al Kellett is an ETF analyst with Morningstar Europe.