U.S. Markets closed

4 Emerging Market ETFs Worth A Look

Rusty Vanneman

Have emerging market equities finally turned the corner?

Relative performance and asset flows in recent months show we might be entering a new period of emerging market outperformance. It makes sense. EM equities are dirt-cheap compared with the U.S. stock market in terms of valuations, which shouldn't be a surprise given the multiyear relative performance bear market for EM.

If investors want to wade back in to EM, but are still nervous given its notorious volatility and underperformance over the last five years, which ETFs should they turn to? There is a wide array of emerging market ETF options these days, and many are, quite frankly, pretty cool portfolios.

It's a big asset class, comprising many segments and strategies, and there's an ETF for nearly every possible exposure. One way to attain fresh exposure, especially if one is tentative, is to select an ETF with a lower risk profile, at least relative to its EM brethren.

Common Threads In Low Volatility

Among the emerging market ETFs with the least volatility, there are some common threads. They are either dividend-oriented, low-volatility, high-quality, currency-hedged, frontier EM or some combination thereof. At CLS, we are increasingly emphasizing factor investing and smart-beta ETFs, so we would look to those ETFs emphasizing factors that have historically provided long-term excess returns.

That would eliminate the currency-hedged EM ETFs (currency hedging is always good for a debate, and discussions at CLS meetings are no exception), and frontier markets (which we believe is a great asset class of its own).

Next, we would eliminate some of the smaller ETFs in terms of assets under management. (This does currently knock out some very interesting ETFs from solid ETF providers, such as EG Shares and PowerShares.)

Four Funds To Consider

This brings us down to four intriguing ETFs:

  1. FlexShares Morningstar Emerging Markets Factor Tilt (TLTE | C-91) is a solid option for investors who want a lower-risk, multifactor EM ETF. This ETF seeks to enhance exposure to developing market stocks by tilting the portfolio toward the long-term growth potential of small-cap and value segments.
  2. iShares MSCI Emerging Markets Minimum Volatility (EEMV | B-71) also emphasizes an investment factor, but in this case, it is minimum volatility, not value and market cap. EEMV seeks to track the investment results of an index composed of emerging market equities, which, in the aggregate, have lower-volatility characteristics relative to the broader emerging equity markets.
  3. SPDR S&P Emerging Markets Dividend (EDIV | C-49) emphasizes the dividend factor. It tracks the S&P Emerging Markets Dividend Opportunities Index, which generally includes 100 tradable, exchange-listed common stocks from emerging market countries that offer high-dividend yields. In addition to some liquidity factors, stocks must have positive three-year earnings growth and profitability.
  4. WisdomTree Emerging Markets High Dividend (DEM | B-81) is another dividend-oriented ETF. It tracks an index that measures performance of the highest-dividend-yielding stocks selected from the WisdomTree Emerging Markets Dividend Index. At the index measurement date, companies within the index are ranked by dividend yield. Securities ranking in the highest 30% are selected for inclusion, and companies are weighted based on annual cash dividends paid.

The Differences

Each ETF has generally lower volatility than most emerging market ETFs, but each also has notable differences:

First, there are considerable differences in sector exposure. TLTE, for instance, is much more geared to overall growth and has the highest allocations to cyclical sectors, such as consumer discretionary and industrials. DEM is not far behind, with heavier allocations to energy and materials. EEMV, meanwhile, has the most exposure to non-cyclical sectors, such as consumer staples. EDIV stands out with the most exposure to telecom.

Ticker Fund Exp. Ratio GICS
Cyclical
GICS
Noncyclical
Consumer
Discretionary
Energy Financials Industrials Tech Materials Consumer
Staples
Health
Care
Telecom Utilities
TLTE FlexShares Mstar Emrg Mkts Fct Tl Idx 0.65 82 18 12 6 28 10 16 10 6 3 4 4
EEMV iShares MSCI Emerging Mkt Min Vol Idx 0.25 60 40 6 3 27 7 16 2 12 7 13 8
EDIV SPDR S&P Emerging Markets Dividend 0.49 70 30 8 2 29 7 17 6 0 0 23 7
DEM WisdomTree Emerging Mkts Equity Inc 0.63 78 22 5 17 24 5 13 14 1 0 15 6

When it comes to regional exposure, there are also some noteworthy differences. EDIV, for instance, has by far the least exposure to Asia, but leads in exposure to nearly every other region, notably the frontier markets in Africa and the Middle East. EEMV has the most exposure to Asia, but by far the least to Europe.

Ticker Fund Equity Region
Asia
Equity Region
Europe
Equity Region
Latin
Equity Region
Africa/M
Equity Region
Japan %
Equity Region
Asia Dev
TLTE FlexShares Mstar Emrg Mkts Fct Tl Idx 42 7 11 8 0 31
EEMV iShares MSCI Emerging Mkt Min Vol Idx 46 2 11 11 0 30
EDIV SPDR S&P Emerging Markets Dividend 21 17 13 16 0 33
DEM WisdomTree Emerging Mkts Equity Inc 35 21 11 8 0 26

So, which ETF is best of the four?

Each ETF has its merits. They are all broad-based EM funds with lower-risk profiles. Each is driven by factor investing. All have decent size and liquidity. The differences, however, really come through on the sector and regional levels.

So the answer is, it depends—mainly on the portfolio it would be inserted into. In other words, how does it complement current holdings and mesh with the portfolio manager(s)' outlook for a sector or region?

At CLS, we would use and have used each of these funds, and we believe it's a fine group to select from.

At the time of writing, CLS Investments held EEMV, EDIV and DEM. CLS Investments is an Omaha, Nebraska-based third-party investment manager and ETF strategist. CLS began to emphasize ETFs in individual investor portfolios in 2002, and is now one of the largest active money managers using exchange-traded funds, with more than $2 billion invested. Contact CLS' Marketing Communications Specialist Sadie Brewer at 402-896-7406 or at sadie.brewer@clsinvest.com. Please click here for a complete list of relevant disclosures and definitions.

Recommended Stories

Permalink | © Copyright 2016 ETF.com. All rights reserved