Checking In: A Mid-Cap Emerging Markets Play

For all the emerging markets ETFs that are out there, and there is no shortage of them, the mid-cap spectrum has been all but ignored. Think about it. As an asset class, emerging markets ETFs started out solely devoted to large-cap stocks.

That changed with the rising popularity of multi-country and country-specific funds offering small-cap exposure. But somewhere along the way, mid-caps were passed over.

The folks at IndexIQ, the New York-based ETF issuer, changed that in July with the introduction of the IndexIQ Emerging Markets Mid Cap ETF (NYSE: EMER), today's candidate for a special edition of “Checking In.”

A few things immediately stand out about the IndexIQ Emerging Markets Mid Cap ETF. Obviously, this is a first-to-market multi-country ETF offering emerging markets mid-cap exposure. Second, it should prove to be a valid idea that investors eventually warm to. Third, the timing of EMER's debut left something to be desired.

The IndexIQ Emerging Markets Mid Cap ETF features an expense ratio of 0.75%, which is a tad high even by the standards of emerging markets ETFs, but the new fund does hold nearly 350 stocks. Four sectors, consumer discretionary, financials, industrials and materials, get double-digit weights in EMER.

That's solid sector diversity, but there's a slight problem. Financials account for over 18% of EMER's weight and now is not the time to be that heavy in that sector.

Another issue that EMER has faced is the seemingly never ending slack performance of Chinese equities. With Taiwan and China combing for over a third of the new ETF's country weight, that's a problem in this environment.

In fact, EMER is heavily weighted to Asian emerging markets and with only small weights to the two best markets, Indonesia and Thailand, China really needs to start performing well to boost this ETF going forward.

That Latin America exposure pales in comparison to the Asia exposure, which is good considering how Brazil is acting. Overall, the IndexIQ Emerging Markets Mid Cap ETF should be a winner and the concept is one of the better among 2011's new ETFs. We just need to see a more cooperative market to get really excited about this ETF.