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A New Multifactor Emerging Market ETF on the Block

Zacks Equity Research
Robust revenues across data service as well as stronger trading and clearing plus listing segments might drive Intercontinental Exchange's (ICE) Q3. However, rising expenses might be a drag.

John Hancock has launched a fund focused on the emerging markets. John Hancock Multifactor Emerging Markets ETF JHEM  uses a multifactor approach. John Hancock has partnered with Dimensional Fund Advisors for this issue. The fund was launched on Sep 28 (see: all the Broad Emerging Market ETFs here)

‘With the addition of this ETF focused on emerging-market equities, we round out our suite of core equity ETF offerings that clients can use to build a global equity allocation," said Andrew G Arnott, president and CEO of John Hancock Investments and head of Wealth and Asset Management, United States and Europe. He added that "We're pleased to bring Dimensional's time-tested multifactor approach to our investors once again with this ETF."

Inside JHEM

It tracks the John Hancock Dimensional Emerging Markets Index. The underlying index targets stocks that are part of the top 80% of largest stocks available in the EM countries around the world. The range may be extended to 85% to reduce unnecessary trading costs. The benchmark focuses on several factors like small-cap, low relative price and higher profitability.

The fund tries to balance the tradeoffs among competing premiums and budget for unnecessary turnover and trading costs through the use of index memory. The fund avoids low momentum securities for additional purchases and changes that do not improve the risk return profile of the overall index. In the event of sale of substantial securities, the proceeds are invested in increasing factor exposure.

Geography-wise, JHEM's selection universe includes  Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Malaysia, Mexico, Peru, the Philippines, Poland, Qatar, Russia, South Africa, South Korea, Taiwan, Thailand, Turkey and the United Arab Emirates (read: Emerging Market Currencies Falling: These ETFs Are Still Hot).

None of the 528 securities in the fund hold more than 3.87% weight with the top weight occupied by Samsung Electronics Company Ltd. (SSNLF). Since its inception, the fund has amassed $5 million and charges an expense ratio of 0.55%.

How does it fit into a portfolio?

U.S. stocks are going up this year due to Trump’s pro-growth agenda. But now the effects of  the tax cuts are well integrated into the stocks as the companies are trading 18 times forward earnings, which is above the long-term price to earnings (P/E) ratio of 15 times, resulting in 20% overvaluation. The EM stocks are trading below their long-term average of around 16. The EM equities are trading at around 11 times their forward P/E ratio, hence undervalued by 30%.

Dividend yield parameter also shows the same story. EM’s are distributing dividends at 3.35%, reflecting an increase of 82% from that of Washington stocks that are offering a forward dividend yield of 1.84%. These numbers show that there are buying opportunities in EM equities. Per JP Morgan, EM equities could rally up 15% over the next six months with developing nations cutting their performance gap with U.S. peers.    

Many market experts still believe in EM equities as their fundamentals remain sound. Blackrock sees “this year’s EM selloff more as a series of idiosyncratic accidents masking stronger EM fundamentals rather than a canary in the coalmine for global markets. EM economies are holding up, and recessions in trouble spots like Turkey and Argentina should have limited impact.” (Read: ETF Asset Report of September).


This multifactor fund will face competition from ETFs like iShares Edge MSCI Multifactor Emerging Markets ETF EMGF and Hartford Risk-Optimized Multifactor Emerging Markets Index ROAM. EMGF maximizes exposure to value, momentum, quality and low size factor risk premium while ROAM selects securities based on a combination of three factors: value- 50%, momentum-30% and quality-20%. The expense ratios of EMGF and ROAM are 0.45% and 0.49% respectively.

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ISHARS-FS MSCI (EMGF): ETF Research Reports
HARTFRD EMG MKT (ROAM): ETF Research Reports
JH-MULTF EM (JHEM): ETF Research Reports
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