Investors interested in the developing markets can consider the Lattice emerging market exchange traded fund as a way to gain diversified and improved risk exposure.
Drawing upon its years of experience with managing institutional assets as well as assets from other investment advisors, Lattice Strategies recently launched the Lattice Emerging Market Strategy ETF (NYSEArca: ROAM). [Lattice Strategies Enters ETF Space With Three Funds]
“The Fund seeks to generate returns through the systematic re-allocation of risks commonly found in capitalization-weighted emerging markets indexes and similarly benchmarked active approaches,” according to Lattice. “Lattice ROAM seeks to improve risk efficiency and enhance returns in emerging markets.”
ROAM tries to reflect the performance of the Lattice Risk-Optimized Advancing Markets Strategy Index. Unlike the traditional market-capitalization-weighted indexing methodology, ROAM’s underlying Lattice Index tries to improve risk efficiency by de-concentrating capital allocation at the country and company levels.
The indexing methodology reduces concentrations in larger, export-driven emerging economies that are closely linked to developed markets, such as Taiwan and South Korea Additionally, the ETF has a lower exposure to global multi-nationals and state-owned enterprises in favor of increased exposure to . smaller, more locally driven companies.
ROAM’s “Index methodology establishes risk-balanced country baskets that reflect each country’s general economic footprint. By using downside risk to determine company weighting, the methodology de-concentrates capital allocation and re-allocates risk capital across the wider opportunity set (increased allocation to smaller, more locally driven countries and enterprises),” according to Lattice.
At the individual company level, the indexing methodology seeks larger allocations to individual companies with favorable relative valuation, momentum and quality characteristics.
“The risk-balanced country basket improves resiliency through risk diversification while broadening exposure to a more complete economic opportunity set,” according to Lattice.
For investors seeking to allocate more capital deeper into emerging economies, ROAM offers a way to gain access through what appears to be a robust methodology.
Chart Courtesy: Lattice Strategies