Tilting the Right way With an Emerging Markets ETF

Last Friday’s declines not withstanding, emerging markets equities and the relevant exchange traded funds have been impressive performers this year.

Investors are taking notice. Since the beginning of March, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), the largest emerging markets ETF, has added nearly $366 million in new assets. Just last week, the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) added over $787 million in new assets.

VWO and EEM are among the most well-known emerging markets ETF, but with the asset class rebounding, investors should consider alternatives, including the FlexShares Morningstar Emerging Markets Factor Tilt Index Fund (NYSEArca: TLTE).

TLTE, which debute in September 2012 and is now home to $237.3 million in assets under management, is not your grandfather’s emerging markets ETF and that is OK because TLTE’s break from the traditional is driving significant out-performance of its peers this year. [A Different EM Tilt]

While EEM and VWO are each up more than 8% this year, impressive to be sure, TLTE has surged 10.2%. TLTE tracks the Morningstar Emerging Markets Factor Tilt Index, which tries to provide “enhanced exposure” to emerging market equities by tilting exposure toward the long-term growth potential of small-cap and value stocks.

At the country level, TLTE is not a vast departure from its aforementioned rivals as China, South Korea and Taiwan combine for nearly 54% of the ETF’s weight. That says TLTE’s indexing methodology accounts for its out-performance of equivalent, cap-weighted funds. [EM ETFs the Smart Beta Way]

To its credit, TLTE has managed to outpace its rivals this year despite relatively light exposure to, in some cases, resurgent state-run companies. Although TLTE has a 26.4% weigt to financial services names, often a sector chock full of state-run comapanies in the emerging world, the ETF’s combined allocation to also state-run heavy materials, telecom and utilities sectors is less than 19%.