Capitalizing on Emerging Markets Momentum

Exchange traded funds that subscribe to momentum strategies have been around longer than the recent craze surrounding intelligent indexing would seem to indicate.

One of the more seasoned members of the momentum ETF group is the PowerShares DWA Emerging Markets Momentum Portfolio (NYSEArca: PIE). Home to one of the more memorable tickers in the ETF arena, PIE is about a month shy of its sixth anniversary with $362.3 million in assets under management, indicating the idea of applying momentum investing to emerging markets equities has proven successful. [The Best Emerging Markets ETFs]

PIE’s momentum-based emphasis means the ETF’s lineup is often overweight select developing markets while being underweight others compared to the MSCI Emerging Markets Index. PIE tracks the Dorsey Wright Emerging Markets Technical Leaders Index.

For example, at the start of the fourth quarter, PIE was underweight the BRIC nations, but was overweight Mexico, South Africa, Taiwan and Turkey. PIE is also underweight South Korea, though Asia’s fourth-largest economy is the fund’s fourth-largest country weight at 12.4%, giving PIE some leverage to what has recently been one of the better-performing emerging markets. [PIE Slices: How This Popular ETF Will Look in Q4]

PIE “tends to perform best, relative to the cap-weighted MSCI Emerging Markets Index benchmark, when there is a large difference between the best- and worst-performing emerging-markets countries. This fund also does not have some of the drawbacks of a cap-weighted index fund–namely, a consistent, significant exposure to government-controlled entities and global cyclical firms,” writes Morningstar ETF analyst Patricia Oey.