Amid bargain-hunting emerging markets equities are bouncing back. With closer look at exchange traded funds, investors may notice that some smart-beta or fundamental options are outperforming broader funds.
For instance, the PowerShares FTSE RAFI Emerging Markets Portfolio (NYSEArca: PXH) has been outperforming traditional market-cap weighted emerging market ETFs. PXH is up 2.0% over the past week and up 7.6% over the last month. Meanwhile, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) rose 1.1% over the past week and is 5.6% higher over the past month, and iShares MSCI Emerging Markets ETF (NYSEArca: EEM) gained 1.1% over the past week and increased 5.0% over the last month. [Confidently Buying Emerging Markets ETFs]
Investors have turned to the emerging markets specifically because of their cheap valuations, and the smart-beta or fundamental indexing methodology also leans toward value stocks. [Very Valuable Value ETFs]
As investors turn to value plays, the fundamental emerging market ETF provides a type of value among value investment. VWO’s stock portfolio has a 11.1 P/E ratio and EEM has a 10.7 P/E ratio, whereas PXH has a P/E of 8.2, according to Morningstar data.
Specifically, PXH’s underlying index selects companies based on book value, cash flow, sales and dividends, and the index weights positions based on the highest fundamental strength.
“By using fundamental factors to weight holdings, the RAFI index tilts slightly toward value, which should be attractive to long-term investors, as the value premium has also been observed in emerging markets,” writes Morningstar analyst Patricia Oey. “The value tilt is reinforced by the fund’s annual rebalancing, during which relatively expensive securities are pared down and relatively cheap ones are added to the fund.”