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 (NYSEArca: 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 (NYSEArca: 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.