The SPDR MSCI Emerging Markets Quality Mix ETF (NYSEArca: QEMM), which tries to reflect the performance of the MSCI Emerging Markets Quality Mix, targets emerging stocks based on value, low volatility and quality strategies and then equally weights the combination. QEMM has a 12.64 P/E and a 1.46 P/B and added 7.0% year-to-date.
The FlexShares Morningstar Emerging Markets Factor Tilt Index Fund (NYSEArca: TLTE) takes a traditional smart beta approach with its emphasis on small-caps and value stocks, along with fundamental characteristics like return variability and yield. TLTE has a 9.70 P/E and a 0.95 P/B and was up 7.9% year-to-date.[related_stories]
A number of fund sponsors have also enter the space with alternative index-based ETF options to differentiate their offerings from traditional market cap-weighted index funds. For instance, the Legg Mason Emerging Markets Diversified Core ETF (NasdaqGM: EDBI) breaks down the universe of securities into investment categories based on sectors and countries. The five-year return patterns of the countries and sectors are taken to uncover relationships – areas that behave alike or differently. The underlying index then combines investment categories with more highly correlated historical performance into smaller number of so-called clusters, which are categorized based on tendency to behave similarly, or show various correlations. Each of these clusters are then equally weighted individually and also equally weighted across the portfolio to produce a diversified investment strategy. EDBI has a 14.04 P/E and a 1.58 P/E and gained 12.2% year-to-date.
The Goldman Sachs ActiveBeta Emerging Markets Equity ETF (NYSEArca: GEM) tracks the ActiveBeta indexing methodology, which provides exposure to common investment factors like value, momentum, quality and low volatility in an attempt to outperform broader benchmarks with potentially smaller drawdowns. GEM has a 12.15 P/E and a 1.35 P/B and was up 7.3% year-to-date.
The JPMorgan Diversified Return Emerging Markets Equity ETF (NYSEArca: JPEM) tracks the FTSE Emerging Diversified Factor Index, which incorporates a multi-factor screening process that combines value, momentum and quality factors. JPEM has a 11.98 P/E and a 1.42 P/B and increased 10.8% so far this year.
The recently launched Deutsche X-trackers FTSE Emerging Comprehensive Factor ETF (NYSEArca: DEMG) tries to reflect the performance of the FTSE Emerging Comprehensive Factor Index, which targets emerging market equities based on five factors, including quality, value, momentum, low volatility and size.
This group of alternative index-based ETFs allow investors to diversify away from traditional market capitalization-weighted indices that may be overly exposed to a specific group of countries or sectors. For instance, the FTSE Emerging Markets Index includes about a 50% tilt toward South Korea, China and Taiwan, along with a 80% weight toward the BRICs – Brazil, Russia, India and China. In contrast, DEMG shows a weight of 16.5% toward South Africa, 15.2% China, 12.1% Taiwan, 8.6% Brazil, 8.6% Mexico, 7.6% India, 6.9% Malaysia, 4.2% Russia, Thailand 3.7% and Chile 3.1%. Investors may consider taking a more diversified approach to the developing world through non-market-cap-weighted funds.
Full disclosure: Tom Lydon’s clients own shares of PXH and FNDE.