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Value Is Working Here, Too

ETF Professor

This year, investors are hearing plenty about the resurgence of the value factor and the reemergence of emerging markets equities and exchange-traded funds. On that note, it would appear logical that marrying those two themes would be rewarding.

The PowerShares FTSE RAFI Emerging Markets Portfolio (NYSE: PXH), the emerging markets cousin of the popular PowerShares FTSE RAFI US 1000 (ETF) (NYSE: PRF), is up nearly 10.6 percent year-to-date. That is more than five times better than the MSCI Emerging Markets Index.

As is often the case in emerging markets, government looms large; however, that has been a positive for investors this year.

Related Link: Buybacks Meet Spinoffs And Value Stocks In This New ETF

“Emerging market government actions have also been constructive. The Indian government is seen as pro-growth, and there is hope that bad loans are finally being washed out of India’s banking sector. In South America, Brazil could see President Dilma Rousseff impeached in the coming months, and the hope is that a new government will unleash positive growth policies and bolster investor confidence. The Brazilian market has begun to factor in these prospects, but Brazil’s major stock market index, the Ibovespa, remains well off its 2008 highs,” said PowerShares in a note out Tuesday.

Country Weights, Exposure

Brazilian and Indian stocks combine for 30 percent of PXH's weight. Brazil, Latin America's largest economy, is PXH's second-largest country weight behind China at 23.1 percent. PXH's Brazil weight is more than triple that of the MSCI Emerging Markets Index.

The ETF is also benefiting from rebounding Russian stocks. PXH devotes more than 10 percent of its geographic weight to Russia, an allocation to that country that is more than double that of the MSCI Emerging Markets Index.

PXH As A Value ETF

PXH shares something in common with U.S.-focused value ETFs: significant dependence on the energy and financial services sectors as drivers of returns. This is not surprising when considering many emerging markets ETFs are chock full of state-controlled companies and those sectors have two of the largest concentrations of such firms. Financial services and energy names combine for nearly 56 percent of the ETF's weight.

“From a valuation perspective, there’s a lot to like about emerging market stocks. The forward price-to-earnings (P/E) ratio on the MSCI Emerging Markets Index was 12.6 at the end of March, compared with 17.4 in the US. That discount is below the -2.8 median forward P/E ratio spread seen since June 2005. There is a similar setup with the MSCI EAFE Index, where the emerging market forward P/E discount is below the median. Cheap emerging market valuations have been driven by political risks and weak economies. Some of these factors are starting to shift, which may improve valuations,” added PowerShares.

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