Much attention has been paid to exactly what makes intelligent index or smart beta exchange traded funds tick. Plenty of effort has been expended trying to apply better terminology than “smart beta” and detractors have spent plenty of time, well, detracting from the notion that are advantages to a non-cap weighted way of doing business.
Lost in all that noise, much of which amounts fear-mongering and non-productive nonsense is that advantages, and to be fair, the risks of enhanced index methodologies are not confined to U.S.-focused ETFs. A growing number of ETFs offer smart beta avenues to emerging markets stocks, including the FlexShares Morningstar Emerging Markets Factor Tilt Index Fund (TLTE) . [Smart Beta, Cap Weighted ETFs Can Work Together]
Though not a traditional ETF per se, TLTE takes a traditional smart beta approach with its emphasis on small-caps and value stocks. The result is an ETF that, on the surface, may not strike investors as noticeably different than more prosaic offering such as the iShares MSCI Emerging Markets ETF (EEM) .
For example, China, South Korea, Taiwan and Brazil combine for about 56% of TLTE’s country weight, the same presence of that quartet in EEM. Financial services, technology and consumer discretionary stocks combine for half of TLTE’s sector weight. Those groups combine for over 52% of EEM. [Smart Beta for Emerging Markets]
TLTE’s top-10 holdings, which include Samsung, Tencent and OAO Gazprom, mirror those found in EEM. However, the key difference here is TLTE’s top-10 constituents combine for just over 10.2% of the fund’s weight while EEM’s top-five holdings combine for over 10% of that ETF.
Including small-caps deepens TLTE’s bench in significant fashion. The ETF had almost 2,200 holdings at the end of the first quarter compared to the 830 currently found in EEM.
Stocks with the value designation accounted for almost 43% of TLTE’s weight at the end of the first quarter while micro- and small-caps represented a combine for 34.3% of the ETF’s weight, according to FlexShares data.
Due to its significant exposure to smaller stocks, TLTE does not trade at a discount to the MSCI Emerging Markets Index as has been seen with other smart beta emerging markets ETFs with a more direct focus on value stocks. [EM ETF With a Value Tilt]
The ETF sports a P/E ratio of almost 19, well above the MSCI Emerging Markets Index. However, TLTE has returned 7.2% over the past 90 days, confirming why investors have poured $45.4 million, or 18% of the ETF’s assets, into the fund this year.
FlexShares Morningstar Emerging Markets Factor Tilt Index Fund