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%.
TLTE’s upside has been bolstered by the temerity of Chinese banks, of which three are found among the ETF’s top 10 holdings.
That bullishness has been accrued against the backdrop of dividend cuts from Chinese banks. Amid rising bad debt, three of China’s four largest banks earlier this month announced payout cuts with one, China Citic Bank Corp., scrapping its dividend altogether, according to Bloomberg. [EM Dividend ETF Bounces Back]
Add to that, pay cuts and restrictions have sparked a spate of executive departures at the Bank of China, Bank of Communications, and China Construction Bank, among others.
Remember, the “tilt” in TLTE is away from large-caps and towards higher allocations to mid- and small-caps than are seen in most diversified emerging markets ETFs. That strategy has proven advantageous in years in which state-controlled firms have been laggards. Since inception, TLTE’s underlying index has outpaced the MSCI Emerging Markets Index by nearly 70 basis points, according to FlexShares data.
FlexShares Morningstar Emerging Markets Factor Tilt Index Fund
