All you have to do is look at the exchange-traded funds and closed-end which track the emerging markets and the BRIC nations (and those surrounding the BRICs).  Ugly is not quite the right description and we will explain more after showing just how bad the carnage is.  Greece is no emerging market, but it is on the path to default faster than emerging markets used to default.

The ETFs for the broad emerging markets is not a good signal for their equity markets.  The revolutions of early 2011 did not help, nor did the food inflation, but the economic slowing is taking a hit here left and right.  iShares MSCI Emerging Markets Index (NYSE: EEM) closed down 2.1% at $34.36 and the 52-week trading range is $34.29 to $50.43 (52-week low was Monday).  Vanguard Emerging Markets Stock ETF (NYSE: VWO) closed down 1.75% at $35.20 and the 52-week trading range is $35.13 to $50.92 (52-week low was Monday). 

We have included the most active ETF chart on each from Stockcharts.com at the end of this report.  The data on the BRICs is almost shocking…

BRAZIL

Brazil may have energy independence and the Olympics headed its way, but the implosion there has been massive.  The BOVESPA lost 2.9% of its value on Monday and let’s just say that its high-flyers are now grounded due to more than just weather.  It seems that minerals and forestry are not going to generate cash, just like it missed out on royalties from the term “Brazilian” in personal grooming. 

iShares MSCI Brazil Index (NYSE: EWZ) closed down 2.1% at $50.89 and the 52-week trading range is $50.71 to $81.77 (52-week low was Monday).  Market Vectors Brazil Small-Cap ETF (NYSE: BRF) closed down 3.15% at $37.96 and the 52-week trading range is $37.73 to $63.78 (52-week low was Monday).  iShares MSCI Chile Investable Market Index (NYSE: ECH) closed down 3.8% at $51.16 and the 52-week trading range is $50.92 to $80.38 (52-week low was Monday).  Aberdeen Chile Fund, Inc. (NYSE: CH) closed down 4.9%  at $13.45 and the 52-week trading range is $13.37 to $26.56 (52-week low was Monday).

The iShares MSCI Emerging Markets Index (NYSE: EEM) aims to track the MSCI Emerging Markets Index, but it actually does not invest in every single index company. Nearly 60% of its near-$37 billion in assets is allocated to Asian equities. Latin American shares make up about 21% of assets, and almost 20% of its funds are invested in emerging Europe and Africa.  At last look, the EEM included 800 of the 912 index stocks.

Usually we see something close to 50,000 contracts or more in a day trade in the Put options.  Not today. In the July-2011 Put Options we have seen over 259,000 contracts trade and the open interest of the corresponding contracts is over 530,000 contracts.  The table below will show you what you need to know, and that was at a 12:10 PM EST time stamp.

Joe Kunkle of OptionsHawk.com noted to us today, “Big blocks of July puts traded in Emerging Markets (EEM) just after 10:15am, the $47, $43, and $42 strikes, mainly sellers, either to close or willing to be long.  Traders will sell puts at key support levels when volatility spikes, and since those blocks, volatility has been fading hard in the EEM.”  In short, this is not your normal volume spike.

The emerging market shares ETF is down 1.4% at $45.00 today, which is actually down a tad less than the broader US market.  The 52-week trading range is $36.76 to $50.43.  Many investors are looking back much farther now for past valuations and the peak in the EEM was close to $55.00 back in 2007 before the recession took control.

JON C. OGG

The firm has postponed a reclassification of both South Korea and Taiwan as developed markets until its 2012 review. The decision means that the Vanguard Emerging Markets Stock Index (VEIEX), the Vanguard MSCI Emerging Markets ETF (NYSE: VWO), and the iShares MSCI Emerging Markets Index (NYSE: EEM) are unlikely to undergo a major revision this year. South Korea is the world’s 15th largest economy as measured by GDP and Taiwan is the 24th largest. Of course if China, Russia, India, and Brazil, all ranked in the top 12 are still considered emerging markets, then it makes some sense to leave South Korea and Taiwan among the group.

Both Taiwan and South Korea were held back by what MSCI terms “accessibility issues”  such as currency convertibility.

Other funds with significant exposure to emerging markets in Asia are Driehaus Emerging Markets Growth Fund (DREGX), where 36% of total assets of $857 million are held in emerging Asia markets. Larger funds are also heavily weighted toward emerging Asia. The T.Rowe Price Emerging Markets Stock Fund (PRMSX) holds nearly 34% of its total assets of $5.9 billion in emerging Asia, and the American Funds New World A fund (NEWFX) holds about 25% of its $22 billion in total assets in emerging Asia markets.

The top South Korean holding in all three of these funds is Samsung Electronics. Taiwanese companies don’t figure in as high or as consistently, with DREGX going for Taiwan Mobile, PRMSX going for Hon Hai Precision Ltd., and NEWFX opting for HTC Corp., as their top picks from Taiwan.

Another large fund we looked at yesterday, Oppenheimer Developing Markets A (ODMAX), currently has Taiwan’s HTC Corp., the leading maker of smartphones that use Google Inc.’s (NASDAQ:GOOG) Android operating system, at the top of its holdings. Samsung is the third largest holding of VEIEX and China’s largest mobile carrier, China Mobile Ltd., is the fund’s fourth largest holding.

One thing all these stocks have in common is their focus on technology and communications, where both South Korea and Taiwan are very strong. Taiwan Mobile is that country’s leading mobile phone carrier and Hon Hai makes iPhones and iPads for Apple Inc. Samsung Electronics is another large provider of Android-based smartphones.

The market for smartphones is exploding and expected to continue growing for some time. If South Korea and Taiwan were elevated to developed market status, almost all the high-performing stocks of smartphone manufacturers would disappear from the emerging market indexes and fund portfolios. And they wouldn’t be easy to replace with stocks of equal quality.

For now, though, MSCI has issued both the stocks and the portfolios a reprieve for at least another year. But some re-shuffling could occur between now and next June  when MSCI reviews its classifications again.

Paul Ausick

There are some very large-cap open-end funds and ETFs that manage more assets than the GDP of any number of small companies. We’re going to take a look at four, two mutual funds and two ETFs: Vanguard Emerging Markets Stock Index (VEIEX); Oppenheimer Developing Markets A (ODMAX); Vanguard MSCI Emerging Markets ETF (NYSE: VWO); and iShares MSCI Emerging Markets Index (NYSE: EEM).

The Vanguard Emerging Markets Stock Index (VEIEX) boasts total assets of $64.2 billion, bigger than all but about 66 countries around the world. The fund uses a passive management approach to invest in all the (currently) 912 common stocks in the MSCI Emerging Markets Index. More than half of the stocks Asia-based, with Latin American and Emerging European stocks garnering about 22% and 11%, respectively. In many ways the fund is not as diversified as it may seem because over half of its assets are invested in China, Brazil, and South Korea. The fund also invests about 85% of assets in large-cap stocks. Fund manager Michael Pierre came on board in 2008. Morningstar gives the fund a 3-star rating.

The Oppenheimer Developing Markets A (ODMAX) fund holds assets totaling about $24 billion. This is an actively managed growth fund that invests in stocks from companies with principal activities in at least three developing markets. Of the 120 stocks in its portfolio nearly 45% are Asian shares. Latin American shares account for almost 29% of assets and Greater Europe/Africa account for nearly 26% of assets. Of the fund’s top holdings, only one is from China, oil E&P company Cnooc. Compare this with VEIEX’s top holdings, which includes four China-based companies in its top ten. Fund manager Justin Leverenz took over in 2007. The fund carries a 5-star rating from Morningstar.

The Vanguard MSCI Emerging Markets ETF (NYSE: VWO), like VEIEX, invests in all 912 stocks included in the MSCI Emerging Markets Index, and seeks to track the index’s performance. Net assets total $64.2 billion. Energy and materials form a big part of the index (about 30%), while financials account for another 24%. The fund also holds 26% of its assets in Taiwanese and South Korean companies. These two nations may be upgraded by MSCI to developed status later this year, changing both the geographic balance in this fund and its weighting toward technology, a strong suit of both countries. The fund gets a 4-star rating from Morningstar.

The iShares MSCI Emerging Markets Index (NYSE: EEM) also seeks to track the MSCI Emerging Markets Index, but does not invest in every index company. Nearly 60% of its $37 billion in assets is allocated to Asia equities. Latin American shares account for about 21% of assets and 19% of assets are invested in emerging Europe and Africa. Because it includes 800 of the 912 index stocks, the fund closely resembles VMO and VEIEX. This fund holds a 4-star rating from Morningstar.

In 2010, VEIEX returned 17.84%; so far this year, returns are -3.46%. ODMAX returned 26.98% in 2010, but is down -0.11% so far in 2011. VWO posted NAV returns of 19.97% in 2010 and 2.4% too date in 2011. EEM returned NAV of 15.95% in 2010 and is up 1.87% so far this year.

Clearly, 2011 is not 2010, at least so far. China’s growth has slowed as the country aims to tame inflation currently running above 5%. Indian inflation is running nearly double China’s, and the government has tightened monetary policy in an effort to bring the rate down. Currency appreciation has hit many other Asian countries, including Singapore, Australia, and South Korea. As always, China is the big dog here, with more than $3 trillion in foreign exchange reserves and little interest in losing a huge part of that by allowing its currency to appreciate fully.

In Latin America, a leftist-nationalist has recently been elected president in Peru and the nationalization of resources in Venezuela and Bolivia has depressed some of the value in those countries’ equities. Brazil and Chile have been fighting off inflation by raising interest rates, which only attracts more foreign investment and pushes up the value of the local currency.

The troubles in Europe are well-known, but less well-known are the debt problems and currency issues in the emerging markets of Eastern Europe. It is unlikely that any of these nations could have a severe impact on global economic recovery, but problems here inevitably bring a reaction from Russia. And speaking of Russia, VEIEX’s largest single holding (1.89%) is Gazprom, the Russian natural gas monopoly.

Rather than looking at ways that these large funds could fail, it is perhaps more interesting to ask whether or not they are too big to succeed. With tens of billions spread across hundreds of investments, a marked improvement in returns depends on significant improvements in the performance of dozens of portfolio equities.

The top holding in each of these funds, except EEM, amounts to right around 2% of the fund’s assets. And the percentages fall below 1% rapidly. Even if a dozen equities doubled in value, the total impact on the entire fund would barely move the needle. This is safe enough, but hardly spectacular.

Paul Ausick

ETF/ETN (Ticker), followed by assets in billions
SPDR S&P 500 (NYSE: SPY) $91.9 billion
SPDR Gold Shares (NYSE: GLD) $56.4 billion
iShares MSCI Emerging Markets Index (NYSE: EEM) $47.1 billion
Vanguard Emerging Markets Stock ETF (NYSE: VWO)    $36.6 billion
iShares MSCI EAFE Index (NYSE: EFA) $36.5 billion
iShares S&P 500 Index (NYSE: IVV) $24.5 billion
PowerShares QQQ (NASDAQ: QQQQ) $21.9 billion
iShares Barclays TIPS Bond (NYSE: TIP) $19.2 billion
iShares Russell 2000 Index (NYSE: IWM) $18.3 billion
Vanguard Total Stock Market ETF (NYSE: VTI) $15.6 billion
TOTAL OF TOP 10 ETPs    $368 BILLION

BlackRock has issues some data today showing the $1 trillion mark has now reached $1.027 trillion on December 16, 2010.  The data is being supplied by BlackRock’s Global ETF Research and Implementation Strategy Team.

The list comprises of 894 ETFs with assets of $887.2 billion from 28 providers.  At the end of 2009 the U.S. ETF industry had 772 ETFs with assets of $705.5 billion from 29 providers.  As of 16 December 2010, there were 185 ETPs U.S.-listed with assets of $115.5 billion, from 20 providers, up from 142 ETPs with assets of $88.1 billion from 17 providers at the end of 2009.

The research shows that some 171 new ETFs have been launched in 2010, while 49 ETFs were delisted.  More importantly, BlackRock noted that there is a whopping count of 828 new ETF products in the pieline.

Net new asset flows signal a growing interest in both developed and emerging markets equity products, with less interest in money flows into fixed income and commodities. Through November, net new flows into North American equity ETFs/ETPs have totaled $21 billion, compared with just $2 billion in 2009.  Flows into emerging markets equity ETFs/ETPs totaled $29 billion against $27 billion last year. Of this total, flows into “multi-region” emerging markets products have totaled $26 billion year to date, compared with $16.7 billion last year.  Flows into fixed income products have totaled $31.2 billion, compared with $44.8 billion last year, and flows into commodity products have totaled $11.4 billion, compared with $32.6 billion last year.

The volume is growing as well, which you would expect.  The ETF average daily trading volume in U.S. dollars through November has risen 26 percent to $57.7 billion. ETF trading volume in November accounted for 24.1% of all United States equity turnover.

You can join our free daily email distribution list to hear more about dividend trends, analyst upgrades and downgrades, top day trader and active trader alerts, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

Morningstar’s John Gabriel noted, “Investors plowed some $19.7 billion into ETFs in March. Those inflows helped push total net inflows for the ETF industry to $7.7 billion for the first quarter of 2010.”

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This new ETF seeks to replicate the returns of the IQ®Hedge Multi-Strategy Index, which was designed to capture the risk-adjusted return characteristics of the collective hedge fund universe using multiple hedge fund investment styles.  This strategy includes long/short equity, global macro, market neutral, event-driven, fixed income arbitrage, and emerging markets.

What gets interesting here is that it uses ETF’s in the ETF’s and gives intra-day liquidity, transparency, and lower fees than most hedge funds.   It uses a wide variety of liquid ETFs already in the market.  More importantly, this does not invest in actual hedge funds.

IndexIQ utilizes its unique Rules-Based Alpha™philosophy to design and build innovative investment products, combining the benefits of traditional indexing with the risk-adjusted return potential sought by the best active managers.

The IQ®Hedge Multi-Strategy Tracker ETF is also said to be the first in a planned series of alternative investment ETFs.  This ETF’s constituents are existing ETFs currently available in the marketplace.  IQ calls it essentially an ETF that is like a “fund of funds.”

The fund’s expense ratio will be 0.75%.  So no “2% and 20%” here.  But here is what you need to know.  The overall success of this ETF is likely going to be dependent upon two issues: its portfolio mix, which ultimately leads to its performance AND its liquidity and trading volume.  So far the trading volume has been light in the first 3 trading sessions, but not so light that traders can’t use it.

Here are the top ETF holdings:

iSHARES Barclays Aggregate (NYSE: AGG) 23.91 %
iShares Lehman Aggregate Bond 23.91 %
iSHARES BARCLAYS 1-3 YEAR TR 18.31 %
iShares Lehman 1-3 Year Treasu 18.31 %
ISHARES MSCI Emerging Markets Index ETF (NYSE: EEM) 11.04 %

JON C. OGG
More information can be found at http://www.indexiq.com/etfs/etfsiqh/etfsiqhmultistrat.html