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.
Bolstering the case for quality investing, those other metrics include high returns on equity, stable dividend growth, robust cash flow, lack of financial leverage, sturdy balance sheets and strong management, notes MSCI.
On the dividend front, the MSCI Emerging Markets (EM) Quality Mix Index features a yield of almost 3.1%, largely the result of a combined 32.5% weight to China and Taiwan. China is the largest emerging markets dividend payers while Taiwan has one of the most favorable dividend policies in the developing world. [China’s Dividend Growth Story]
QEMM will compete with two Market Vectors ETFs that also adhere to MSCI quality indices: The Market Vectors MSCI Emerging Markets Quality ETF (NYSEArca: QEM) and the Market Vectors MSCI Emerging Markets Quality Dividend ETF (NYSEArca: QDEM).
Those ETFs have almost $11 million in combined assets under management and have returned an average of 8.8% since their January debuts. [Quality EM Dividends in One ETF]
ETF Trends editorial team contributed to this post.