Emerging markets equities and exchange traded funds have been getting drubbed in recent months. Already vulnerable, on a broad basis, to potential changes in the Federal Reserve’s interest rate policy, emerging markets stocks were roiled this week when China decided to devalue the yuan.
Macro factors such as those and other themes, including but not limited to plunging commodities prices, the strong dollar and rising debt levels, underscore the importance of selectivity when considering rebound candidates among emerging markets ETFs.
The new Gavekal Knowledge Leaders Emerging Markets (NYSEArca: KLEM), which debuted last month, could prove to be an intelligent way of positioning for upside in developing world equities.
“The Knowledge Effect is the tendency of highly innovative companies to experience excess returns. The investment process aims to capture this market inefficiency using a proprietary methodology which capitalizes corporate knowledge investments, measures firm performance on a knowledge-adjusted basis, and selects investments in Knowledge Leader companies on the basis of knowledge intensity,” according to Gavekal.
At a time when Latin American equities continue struggling, KLEM is an attractive bet at the country level because the new ETF’s underlying index allocates nearly three-quarters of its weight to Asian companies. KLEM, which seizes on growing momentum for smart or strategic beta ETFs, can serve as a replacement for the traditional emerging markets ETFs advisors and investors have previously viewed as “core holdings.” [This ETF Excludes State-Run Companies]
KLEM also offers advantages over traditional, cap-weighted emerging markets ETFs, which are dominated by state-run banks and faltering energy companies, among vulnerable groups.