Factor Foundation With Emerging Markets ETF

With emerging markets equities and the corresponding exchange traded funds outperforming U.S. stocks in significant fashion this year, investors should consider alternative weighting strategies, some of which are proving durable. The Deutsche X-trackers FTSE Emerging Comprehensive Factor ETF (DEMG) help limit correlation and diversify a portfolio to better handle changing conditions over longer periods by screening for historically proven factors like quality, value, momentum, low volatility and size. That ETF is up about 20% year-to-date. Discounted valuations, especially in an environment where U.S. equities are trading near record levels, provide a relatively attractive opportunity for investors. Even after the strong start to this year, current price-to-earnings ratio of MSCI EM is around 15.1, compared to the 22.2 for MSCI USA Index. DEMG follows the FTSE Emerging Comprehensive Factor Index. Looking at the Deutsche Asset Management’s factors, the quality factor helps hone in on the quality of a company earnings as a better gauge of future earnings performance. The underlying indices may provide a quantifiable measure of each company’s profitability, efficiency, earnings quality and leverage. The value factor reflects the idea that cheaper equities are thought to outperform more expensive stocks over the long-term. Consequently, the underlying indices will focus on cash-flow yield, earnings yield and sales-to-price of each company as measures of value. Because it tracks a FTSE index, DEMG excludes South Korean stocks because that index provider classifies South Korea as a developed economy. Taiwan and China combine for 36% of DEMG's weight. South Africa and India combine for 22% of the fund's weight. About 60% of DEMG's geographic exposure is to Asian economies with another 13% allocated to Latin America. Related: A Surging Smart Beta Idea For Ex-US Exposure Although emerging markets exchange traded funds are among this year’s most prolific asset gatherers in the U.S., some market observers argue that emerging markets equities are under-owned by big investors and that the asset class has more room to rally. DEMG holds nearly 700 stocks. None of the ETF's sector weights exceed 12.9%, implying more balance than traditional emerging markets strategies. The industrial, financial services and materials sectors combine for about 37% of DEMG's roster. For more on smart beta ETFs, visit our Smart Beta Channel . Read more on ETFtrends.com