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New Factor-Based Emerging Market ETF from iShares

Zacks Equity Research

With the Fed on the verge of raising rates after almost a decade, emerging markets (EM) are presently running high risks. Investors are hurriedly dumping emerging market products on apprehensions of the end of the cheap-money era in the U.S. (read: Can Emerging Market ETFs Defy U.S. Rates Hike?)

Higher interest rates in the U.S. would fade the appeal for high-yield lure for the emerging market equities. Plus, emerging economies’ growth is slowing with the biggest market China is suffering from a long-drawn-out slowdown. The economies are mostly commodity heavy and are thus extremely susceptible to the prolonged commodity market slump.

All these make fund issuers are very careful and selective when it comes to launching a new EM ETF. In that vein, iShares recently rolled out iShares FactorSelect MSCI Emerging ETF (EMGF). Let’s elaborate the product (read: 4 Safe Ways to Invest in Emerging Market ETFs).

EMGF in Focus
The fund seeks to offer exposure to the developing world via large and mid-cap companies. To screen stocks, the underlying index targets some key criteria including ‘inexpensive stocks, financially healthy firms, trending stocks and relatively low market cap companies’ per the issuer.

Quality of the stock is measured by ‘higher return on equity, earnings consistency and lower debt to equity ratio’ and cheaper valuations are determined by lower P/E and P/B ratios, per iShares.
This focus results in a portfolio holding a basket of 156 well-diversified companies. India ETF iShares MSCI India ETF (7.18%), KT&G Corp (2.46%) and CITIC Ltd (2.37%) are the top three holdings.
However, as far as sector allocation is concerned, the fund has tilt toward Financials which occupies about 23.67% of weight followed by Information technology (15.45%) and Consumer Discretionary (12.78%). Two other sectors, consumer staples and Industrials also have a double-digit weight.

Considering country-wise allocation, China takes the top spot having 29.75% allocation while South Korea (15.54%), South Africa (12.06%) and Taiwan (10.07%) also have double-digit exposure.  The fund charges 70 basis points in fees (see all Broad Emerging Market ETFs here).

How Does it Fit in a Portfolio?

For investors still having faith in the emerging market growth story, this fund can be a good choice. As such, smart-beta investing seems necessary for emerging markets at this point of time when the U.S. economy is about to see the end of the easy-money policy (read: Emerging Market ETFs in Trouble on Stronger Dollar?).

Emerging markets across the board had a great time in previous years on incessant inflows from cheap money and the stocks surged. But as soon as the policy tightening takes place in the U.S., only high quality picks will likely gain investor attention.

Moreover, the fund is well diversified as far as individual stocks are concerned. However, investors should note that the product is a bit concentrated from both a sector and nation perspective, though expenses are reasonable.
ETF Competition

The emerging market equities space is primarily dominated by two large players – Vanguard FTSE Emerging Markets ETF (VWO) and iShares MSCI Emerging Markets ETF (EEM) – managing an asset base of $33.8 billion and $20.8 billion, respectively. However, both of them are market-cap oriented ETFs and thus do not pose threats to the newbie.

The emerging market funds that could act as competitors to the newly launched iShares’ ETF are ActiveBeta Emerging Markets Equity (GEM), FTSE RAFI Emerging Markets Portfolio (PXH), Morningstar Emerging Markets Factor Tilt Index Fund (TLTE), DWA Emerging Market Technical Leaders Portfolio (PIE) and iShares MSCI Emerging Markets Minimum Volatility Index Fund (EEMV). All these are running on smart-beta indexing or some unique approach rather than just revolving around market capitalization.

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ISHARS-FS MSCI (EMGF): ETF Research Reports
ISHARS-EMG MKT (EEM): ETF Research Reports
VANGD-FTSE EM (VWO): ETF Research Reports
GS-ACTV BETA EM (GEM): ETF Research Reports
PWRSH-F/R EMP (PXH): ETF Research Reports
FLEXS-MR EMFTIF (TLTE): ETF Research Reports
PWRSH-DWA EM MK (PIE): ETF Research Reports
ISHARS-MS EMMV (EEMV): ETF Research Reports
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