Advisors can also use a fundamentally-weighted approach to taking a contrarian view of emerging markets. ETFs tracking developing world equities have been vexing propositions over the past several years, prompting many advisors to underweight emerging markets in favor of the comfort and perceived safety of U.S. stocks.
With stocks in developing economies deeply discounted relative to their U.S. peers, disciplined investors can make long-term contrarian bets with an ETF such as the $360.8 million PowerShares FTSE RAFI Emerging Markets Portfolio (NYSEArca: PXH).
Like PRF, PXH is a fundamentally-weighted ETF focusing on the virtues of book value, cash flow, sales and dividends. China, the largest emerging markets dividend payer in dollar terms, accounts for nearly 24% of PXH’s weight.
Despite tumbling currencies, Brazil and South Africa have been able to muster positive dividend growth over the past year. Those countries combine for 26% of PXH’s weight. [EM Dividends on the Rise]
PXH offers more in the way of contrarian points and discounted valuations. The ETF features a 9.5% weight to Russia where the benchmark Micex Index trades at less than half the price-to-earnings ratio of the MSCI Emerging Markets Index. At the end of the third quarter, the FTSE RAFI Emerging Markets Index traded at half the P/E of the FTSE RAFI US 1000 Index, indicating that emerging markets stocks could be well-positioned for superior long-term returns.
Financial advisors who are interested in learning more about contrarian investing with fundamentally-weighted ETFs can register for the Thursday Nov. 20 webcast here.