An exchange traded fund that tracks an “enhanced” indexing methodology has helped emerging market investors realize some returns this year, but the strategy is starting to lag its bigger peers.
The PowerShares DWA Emerging Markets Technical Leaders Portfolio (NYSEArca: PIE) has gained 2.6% year-to-date, outperforming broad emerging market ETFs like the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM), which have declined 9.5% and 8.8% year-to-date, respectively. [PIE: An Emerging Markets ETF Juggernaut]
However, over the past month, PIE has dipped 10.9%, whereas EEM declined 7.9% and VWO dropped 8.5%. PIE is also experiencing heavy selling, with volumes hitting 1.1 million shares Tuesday, compared to an average volume of around 200,000 shares.
Looking at the ETFs’ 52 week range, PIE is now 14.1% off its high while VWO is 12.8% off its 52-week high and EEM is 13.1% off its 52-week high.
PIE tracks the Dorsey Wright Emerging Markets Technical Leaders Index, which utilizes technical factors, including relative strength, to select 100 emerging market stocks that show the best relative performance over the past six to 12 months. In comparison, VWO tries to follow the FTSE emerging markets index and EEM tracks the MSCI emerging markets index.
Consequently, PIE’s country allocations diverged from the broader index ETFs. Specifically, the PowerShares ETF has large allocations to countries like Thailand 13.9%, Mexico 11.9% and Turkey 8.7%, which have outperformed earlier this year but have now turned.
Turkish stocks are now one of the worst performing emerging markets after protests in Istanbul escalated. [Turkey ETF Down Over 20% in a Month on Protest Fears]
After hitting multi-year highs, Thailand stocks are now under pressure, with a rising currency and a faltering export industry. [Travelers Love Bangkok but Investors Dumping Thailand ETF]
Mexico’s markets were also pressured in May, along with other Latina American markets. [The Hangover: Mexico ETFs Drop After Cinco de Mayo]
In comparison, the iShares ETF EEM has a smaller weighting toward these countries. Instead, the top country allocations in EEM include China 17.9%, South Korea 14.7% and Brazil 11.8%.
Nevertheless, PIE’s underlying index has proven to be a better long-term performer. According to PowerShares, the DWA Emerging Markets Technical Leaders Index has gained an annualized 13.5% over the past 3-years and 4.3% over the last 5-years, whereas the MSCI Emerging Markets Index showed a 3.3% 3-year increase and a 1.1% 5-year rise.
For more information on developing economies, visit our emerging markets category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own EEM.