Emerging Markets the Smart Beta Way

ETF Trends

The term “smart beta” is one of the ETF industry’s hottest buzz phrases, but the application of smart beta, or non-market capitalization weighting methodologies, is not limited to developed markets.

Investors can choose from an array of cap-weighted, diversified emerging markets ETFs. Knowing that, some fund issuers have seized the opportunity to bring the smart beta approach to developing world equities. [Advisors Warm to Smart Beta ETFs]

One member of the new generation of smart beta emerging markets ETFs is the FlexShares Morningstar Emerging Markets Factor Tilt Index Fund (TLTE) , which debuted in September 2012 and now has $154.6 million in assets under management. [FlexShares Expands Factor Tilt Lineup]

The “tilt” in TLTE is away from large-caps and towards higher allocations to mid- and small-caps than are seen in most diversified emerging markets ETFs. In a year in which returns accrued by major state-controlled companies throughout the developing world have been mediocre at best, dodging some of largest emerging markets companies has not been a bad idea. [Brazil ETFs Stumble Back to Multi-Month Lows]

With an annual expense ratio of 0.65%, TLTE tracks the Morningstar Emerging Markets Factor Tilt Index. TLTE’s combined 48.7% allocation to China, South Korea and Taiwan is not unfamiliar among major multi-country emerging markets funds, but it is the cap breakdown that makes TLTE unique as small-caps account for over 32% of TLTE’s weight.

Since inception, TLTE’s underlying index has outpaced the MSCI Emerging Markets Index by nearly 70 basis points, according to FlexShares data.

Larger allocations to small- and mid-caps have served as catalysts to help TLTE slightly outpace the rival Vanguard FTSE Emerging Markets ETF (VWO) , the largest emerging markets year-to-date.

Adding to the near- to medium-term bull case for TLTE is the aforementioned country weightings. Combine Malaysia with China, South Korea and Taiwan and over 52% of TLTE’s weight is allocated to country’s that are not plagued by widening current account deficits. [Yellen's Help for EM ETFs may be Fleeting]

Emerging markets disappointments Brazil and India combine for just 15% of TLTE’s weight.

FlexShares Morningstar Emerging Markets Factor Tilt Index Fund

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ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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