PGJ Invesco Golden Dragon China ETF Trust

2012 was full of challenges for investors thanks to low bond rates, a prolonged European debt crisis, and the impending fiscal cliff. In such a scenario, investors duly turned their focus from developed economies to other regions of the world, even though we still saw decent performances in the industrialized world.

In fact, investing in emerging market economies has become a very popular tool among many investors who look to tap the lucrative growth opportunities overseas (Buy These Emerging Asia ETFs to Beat China, India)

There are many emerging market ETFs that have outperformed and provided investors with impressive gains. The iShares MSCI Philippines ETF (EPHE) designed to track the Philippines economy has delivered a solid gain of 39.2% over a period of one year while iShares MSCI Turkey ETF (TUR) climbed 38.9% in the same time frame, as just two examples of crushing returns these markets can produce (Generate Alpha with these Outperforming ETFs).

But not all ETFs focusing on the emerging markets have delivered such gains to the investor. In fact, there are some ETFs that have delivered ultra low returns and bucked 2012’s solid emerging market ETF trend.

Below, we highlight three of the biggest disappointments in 2012 in the emerging market world. Interestingly, three of the worst performers were in Asia, with funds from Vietnam, Indonesia and China making up this disappointing trio:

Vietnam

Economic growth in Vietnam has slowed down in recent times. This is the fifth straight year when the economy will grow below 7%. In 2013, the economy is expected to grow at 5.2%.

Economic growth has slowed down mainly due to a weak export market, lower domestic consumption and rising bad debt levels at the banks. Lower investment and consumer spending also hit hard the growth of the economy.

Credit growth has dropped massively touching 2.77% in 2012 from the highs of 20% to 30% earlier. Lower credit growth rate implies lower economic growth and a rise in bad debt as well.

The region’s poor economic condition has also affected the performance of the Market Vectors Vietnam ETF (VNM) which provides exposure to 34 Vietnamese securities. The fund has performed badly in the last one period, delivering a return of -0.79% (Can the Vietnam ETF Continue Its Run?).

The fund has nearly 19% exposure in banks which explains the poor performance of the ETF. Other than banking, real estate and energy companies get double-digit allocation in the fund.

Coming to regional allocation, apart from Vietnam stocks, the fund also has exposure in United Kingdom and Thailand securities. The fund charges a fee of 76 basis points annually but we have a Zacks ETF Rank of 2 or Buy on the fund now, so we look for a stronger 2013 in the area.

Indonesia

Like any other emerging market, the growth rate of the Indonesian economy was also hurt by the Euro zone crisis and U.S. fiscal woes. But growth was supported by the government’s continuous effort to boost domestic demand and a rising middle class; domestic consumption remains quite robust in Indonesia (Can Anything Stop These Southeast Asia ETFs?).

The Indonesian economy grew at a decent pace and this is expected to continue going forward. In 2013, the region is expected to grow at the rate of 6.6% fueled by domestic consumption and infrastructure spending which helps in offsetting the weakening export demand.

Despite tracking one of the strong emerging market economies, Market Vectors Indonesia ETF (IDX) failed to provide investors with the desired results. The fund could only manage to deliver a return of 0.47%, a very low level considering the economic condition of Indonesia.

The fund invests its $404.3 million asset base in a basket of 41 securities, the majority of which are from banks, food, beverage & tobacco and materials sectors. Small allocations have also been made to other sectors as well.

Economic growth in Indonesia is expected to improve going forward on the back of a recovering export market and better domestic consumption. This would help IDX to provide investors with better gains, and we agree as evidenced by our Zacks ETF Rank of 1 or Strong Buy to start 2013.

China

A leadership transition, a lower GDP growth rate, a higher inflation level and lower global demand for goods impacted the economic health of the once rapidly growing nation of the world, China.

This affected the performance of PowerShares Golden Dragon China Portfolio (PGJ) which provides exposure to mostly large cap Chinese securities. The ETF delivered a return of just 0.86% over a period of one year (China ETF Investing 101).

The fund is home to 68 securities from China and charges a fee of 69 basis points from investors. The fund relies heavily on the performance of the Information Technology sector for its performance as it allocates more than 40% of the asset base in the fund, although consumer discretionary stocks get a big chunk at 20% of the total.

Currently, the Chinese economy seems to have bottomed and is poised for better growth going forward. Industrial production has been boosted and weak export demand is set off by rising domestic consumption.

This indicates a rebound in the Chinese economy which could help the fund to recover and provide investors with impressive gains, although we are somewhat skeptical of this as evidenced by our Zacks ETF Rank of 4 or sell on PGJ.

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ISHARS-MS PH IM (EPHE): ETF Research Reports
 
MKT VEC-INDONES (IDX): ETF Research Reports
 
PWRSH-GL DR HA (PGJ): ETF Research Reports
 
ISHRS-MSCI TURK (TUR): ETF Research Reports
 
MKT VEC-VIETNAM (VNM): ETF Research Reports
 
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