“Market capitalization weighting schemes are not in and of themselves inherently bad, but in the EM the bulk of the market capitalization is represented by yesterday’s “old economy”, state-owned sectors such as financials, energy, materials, telecom and utilities. Just like market capitalization weighting schemes, there is nothing inherently wrong with these sectors, but many (not all) of the companies that compromise them benefit to a large degree from things like accelerating infrastructure spending, rising commodity prices, a weak US dollar, falling corporate interest rates and a booming China,” according to a recent GaveKal research piece.
Importantly, KLEM’s state-owned exposure is scant as energy, financial services and utilities combine for barely more than 2% of the fund’s weight. Rather, KLEM is a credible play on the emerging markets themes of tomorrow, namely technology and the consumer. Technology and consumer sectors combine for about two-thirds of the ETF’s weight.
“So how does one gain cheap, diversified exposure to EMs, but do so in a strategic manner so as to maximize exposure to the sectors and companies that are most likely to see the highest growth rates while downplaying (not eliminating!) exposure to the sectors that are most likely to retreat? The obvious answer is to explore the precious few diversified EM ETF offerings that have an outside-the-box methodology that afford investors an opportunity to participate the high growth areas of EMs. One has to venture outside of the largest ten ETFs by AUM to find the ones that offer diversified EM exposure in a much more intelligent way,” according to GaveKal.
GaveKal Knowledge Leaders Emerging Markets ETF