Emerging markets equities and exchange traded funds have regained some luster this year, outperforming their U.S. peers after delivering negative returns in each of the previous two years.
With that, revisiting an emerging markets ETF with a cult-like following among advisors and investors is a worthwhile endeavor. The ETF to revisit is the $337.3 million PowerShares DWA Emerging Markets Momentum Portfolio (NYSEArca: PIE). Though PIE is trailing its traditionally weighted rivals the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), the PowerShares offering is up almost 9%. [Familiar EM ETF Rises Again]
It is reasonable to expect that should emerging markets stocks be in for a lengthy stretch of out-performance of their developed market rivals, PIE will eventually catch-up to and surpass its aforementioned rivals. Over the past six years, PIE has returned almost 104% while the average return for VWO and EEM is just over 78%, according to Dorsey Wright data.
What is crucial to remember with PIE is that the Dorsey Wright Emerging Markets Technical Leaders Index, PIE’s underlying index, is built on price momentum, which can apply to a plethora of countries and stocks. As PIE highlights, there is a big difference between positive price momentum, which is not confined by sector, and momentum as it applies to biotech or Internet stocks. [Warm up a Slice of PIE]
“While VWO and EEM are weighted by capitalization, the PowerShares DWA Emerging Markets Momentum Portfolio ETF (PIE) is investing in the top 100 Momentum stocks from a universe of approximately 1,000 Emerging Markets stocks. Each quarter, PIE is reconstituted with the 100 stocks that meet our PnF relative strength criteria, reflecting both their near-term and longer-term favorable relative strength characteristics. It’s also important to note that once we identify those 100 Momentum stocks, the index is weighted by Momentum so the strongest names get the most weight,” according to Dorsey Wright.
Given its momentum underpinnings, PIE currently features some surprises at the country level. Notably, the ETF currently features no exposure to Russian stocks, among this year’s best performers in the developing world. Additionally, the ETF’s weight to China is just 10.7%.
Proving that momentum should not be confused with high beta, PIE’s largest country is 21.5% to South Korea, one of the least volatile emerging markets. The ETF’s third-largest country weight, Taiwan at 13.9%, is also one of the least volatile developing markets. [South Korea ETFs Get Some Love]
“As with any relative strength strategy, one of the keys to good performance over time is having sufficient dispersion in the investment universe and as shown below, there has been plenty of dispersion in Emerging Markets! The chart below shows the trailing 12 month performance for the 1,000 Emerging Market stocks from which we select our stocks for PIE. The best stock was up 389% over this period of time and the worst stock was down a mere 82%,” notes Dorsey Wright.
The Philippines is PIE’s second-largest country weight at 16.3%, making the ETF home to the largest weight to that country among diversified emerging markets funds. The MSCI Emerging Markets Index allocates just 1.3% to the Philippines.
PowerShares DWA Emerging Markets Momentum Portfolio