Qualifying Quality in Emerging Markets

Factor investing is a growing part of today’s investment landscape with the quality factor standing as one of cornerstones of select factor-driven strategies.

Issuers of exchange traded funds are increasingly applying factor strategies to new ETFs and the application of those factors, including quality, is not limited to U.S. stocks. The new SPDR MSCI Emerging Markets Quality Mix ETF (NYSEArca: QEMM), which debuted Thursday, applies the quality factor to developing world equities.

Although it is not an explicit low volatility ETF, QEMM could be a valid option for the investor looking to skirt emerging markets volatility. The ETF’s underlying index, the MSCI Emerging Markets (EM) Quality Mix Index, allocates a combined 27% of its weight to South Korea and Taiwan, according to State Street data.

South Korea and Taiwan are two of the most advanced and least volatile emerging markets. Brazil, Russia and India, three of the most volatile large developing economies combine for less than 20% of the index’s weight. [South Korea ETFs Could Rally]

Defining the quality factor and how it is captured underscores the potential advantages of QEMM. The quality factor “captures excess returns to stocks that are characterized by low debt, stable earnings growth and other ‘quality’ metrics,” according to MSCI.