After a rally that spanned nearly two quarters, emerging markets exchange traded funds have lost some luster, but that does not mean opportunity is lost with developing world stocks. It merely means now is the time for investors to be increasingly selective with emerging markets ETFs.
Emerging markets are susceptible to capital flight, falling currencies, rising inflation, aggressive policy changes and political volatility. Consequently, investors should take a closer look at each country before making a decision. Those factors are prompting some investors are prompting some investors to hone in on country-specific ETFs rather than broader funds. [Be Choosy With Emerging Markets ETFs]
“However, choosing country ETFs, while sitting in an office in the United States with lots of things to focus on, can and should be a daunting task,” said S&P Capital IQ in a new research note. “This is why we think the Emerging Market Equity strategy offered by Glovista, an ETF asset manager, is worth learning about. The team behind the strategy focuses initially on a global macroeconomic view that starts with a house view on business cycles, interest rates and currencies of developed markets (Japan, Europe and the U.S.) along with commodities before comparing these views with general consensus. As a result of these views, some major investment themes materialize. Then the ETF asset manager provides a macroeconomic assessment of each of the countries within the MSCI Emerging Market Index, to help determine where management wants to gain exposure to that theme since various country ETFs can fill the need.”
Glovista also conducts analysis of largest holdings in country ETFs because many of those emerging markets funds are highly concentrated in a small number of stocks. Glovista primarily uses iShares ETFs and the investment firm had little to no exposure to Brazil, South Africa and South Korea at the end of last year, according to S&P Capital IQ.
However, the firm will take on exposure to emerging economies that are not heavily weighted or found at all in broader emerging benchmarks.
The iShares MSCI Taiwan ETF (NYSEArca: EWT), which S&P Capital IQ rates overweight, is one of Glovista’s largest positions. Known for its ample exposure to the technology sector (over 57%), the $3.2 billion EWT is also favored by investors because the fund is docile compared to other emerging markets single-country offerings.
EWT’s beta at the end of October was 0.91 and the ETF has a three-year standard deviation of 14.3%, 117 basis points below that of the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), according to iShares data.
Glovista also holds a large stake in the iShares MSCI China ETF (NYSEArca: MCHI), which S&P Capital IQ rates marketweight.
Although far smaller than its stablemate, the iShares China Large-Cap ETF (NYSEArca: FXI), MCHI is home to more than five times as many stocks. That deeper bench coupled with noticeably reduced financial services exposure has helped MCHI offer nearly double the returns of FXI over the past three years. [Proper Application of China ETFs]
Glovista also holds a position in the Market Vectors Vietnam ETF (NYSArca: VNM).
Vietnam, which is classified as a frontier market, “can benefit from a young, highly educated population to support outsourcing needs of global technology companies such as Samsung,” S&P Capital IQ notes, citing Darshan Bhatt, managing partner with Glovista.
“Further Bhatt believes that despite limited liquidity, the country’s equity market trades at an appealing valuation as tensions with China have created an opportunity,” according to the research firm.
VNM, the lone Vietnam ETF, is up 13.6% this year. The ETF has been buoyed by favorable valuations and the hope of increased foreign ownership limits. Earlier this year, Vietnamese policymakers and the central bank revealed plans to lift foreign ownership limits across several sectors financial services and materials. Those sectors combine for 40.6% of VNM’s weight. [Vietnam Eyes EM Status]
iShares MSCI China ETF
