EWM: A great story and a strategic emerging market to consider (NYSEARCA: EWM)

I am a fan of international investing to diversify my exposure not only to the US, but also to large-cap tech stocks in general. One fund that I think is worth looking at in this category is the iShares MSCI Malaysia Exchange Traded Fund (NYSEARCA:EWM) which offers investors a good way to access Malaysian stock markets. Malaysia enjoys a key geographic location that allows it easy access to Southeast Asian markets. The country is rich in natural resources. Its workforce is generally proficient in English and well-educated. Malaysia also has strong systems for important industries such as medical devices, semiconductors and solar panels. EWM is the only ETF in the United States that tracks Malaysian stocks, giving investors a chance to benefit from a growing economy with a lot of potential.

EWM aims to track MSCI Malaysia Index Performance. This index is a free float-adjusted market capitalisation weighted index that includes large and mid-cap companies based in Malaysia. The objective of the fund is to provide investors with an affordable way to replicate the returns of this benchmark index, thereby tapping into the potential gains of Malaysian markets.

An overview of assets

EWM’s portfolio comprises 32 stocks. The top 10 stocks, which together account for just over 60% of the ETF’s investments, clearly have a high concentration risk, but this is not too unexpected given that this is a single-country fund.

EnglishWhat do these companies do? Public Bank is a Malaysian banking group that excels in retail banking and financing services. Its strong position in the Malaysian financial scene underlines the importance of this sector to the country’s economy. Malayan Banking does many things: conventional banking, investment banking and Islamic banking. CIMB Group plays a significant role in the Malaysian banking sector. It offers retail banking, investment banking and Islamic banking services. Tenaga Nasional is Malaysia’s largest electricity company. Its presence in the fund underlines EWM’s involvement in the country’s key infrastructure and energy sectors. And Press Metal Aluminium Holdings is a leader in integrated aluminium production.

Composition and weighting of sectors

The financial sector accounts for the largest portion of EWM’s holdings, at almost 40%, but the fund also allows you to invest in other key sectors of the Malaysian economy.

Utilities account for 14.99% of the portfolio, consumer staples 10.88%, industrials 8.27% and materials 7.99%. This mix of different sectors gives investors a good overview of the Malaysian economic scene.

Peer comparison

In the world of emerging market ETFs, EWM does not have a direct rival that offers targeted exposure to Malaysian equities. Still, investors may want to consider broader regional ETFs, such as the iShares MSCI Pacific ex Japan ETF (EPP). When we look at EWM’s price ratio relative to EPP, we see that EWM has underperformed since late 2019, but recent relative performance looks encouraging and could improve.

Advantages and disadvantages

On the positive side, Malaysia is a promising market, with a growing middle class and good demographics, which could support sustained economic growth and boost corporate profits. The country’s strategic location in the heart of Southeast Asia, as well as its mixed economy spanning sectors such as manufacturing, finance and energy, make it even more attractive to investors.

Investors should, however, consider the dangers of investing in a single-country ETF. Political unrest, currency fluctuations and unclear rules can cause fluctuations and affect the amount of income you earn. Additionally, Malaysia’s economy is heavily reliant on global trade and the sale of commodities, making it susceptible to changes in other countries’ expectations and how much they are willing to pay. Also, keep in mind the high concentration here, not just in the top holdings, but in the financial sector more broadly.

Conclusion

Overall, I like the story and the fund here. It offers good diversification as an emerging markets investment, has a completely unique sector mix compared to what you see in the US, and provides access to a growing part of the world with strong demographics. If you are a fan of international diversification, I think it makes sense to consider the EWM ETF as part of your overall strategy.

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