As investors begin to reconsider the beaten-down developing economies, Deutsche Asset Management has launched a new smart-beta emerging market exchange traded fund with a quality tilt.
Robert Bush, Investment Strategist at Deutsche Bank, told ETF Trends that the emerging markets have been stabilizing and investors are beginning to funnel money back into the asset category.
“Check your emerging market allocations and be sure you’re not avoiding this long-term opportunity,” Bush said.
The emerging markets have been underperforming the U.S. markets for years and now trade at a 30% discount to U.S. equities, the lowest its ever been, Bush noted.
The benchmark MSCI Emerging Market Index currently shows a 11.17 price-to-earnings and a 1.17 price-to-book, according to Morningstar data. In contrast, the S&P 500 is showing a 17.22 P/E and a 2.34 P/B.
As a way to capture the emerging market growth opportunity, Deutsche Asset Management launched the Deutsche X-trackers FTSE Emerging Comprehensive Factor ETF (NYSEArca: DEMG). DEMG has a 0.50% expense ratio.
DEMG tries to reflect the performance of the FTSE Emerging Comprehensive Factor Index, which provides exposure to emerging market equities based on five factors, including quality, value, momentum, low volatility and size.
“Investors who believe emerging markets are poised to rebound may be interested in DEMG, which seeks to identify and overweigh relatively valuable, high-quality emerging market stocks, with relatively positive performance momentum and lower volatility,” Fiona Bassett, Head of Passive in the Americas, said in a press release.
Emphasizing these characteristics, or factors, can potentially help investors outperform traditional market cap-weighted indices.
“With the multi factor suite, there seems to be an inherent insurance policy in the fact that the underlying constituents have to qualify to be included,” Bush added. “If you don’t have a core EM, this might be a good alternative as it represents the five drivers of historical outperformance.”
[related_stories]Due to its multi-factor indexing methodology, DEMG will help investors diversify away from potential over-concentration risks associated with market capitalization-weighted index fund, which may hold up to 50% of its portfolio in China, South Korea and Taiwan. Instead, DEMG includes 16.5% 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%.
Additionally, DEMG is less heavy on its top sector allocations, compared to the benchmark emerging market indices. The smart-beat ETF’s sector weights include financials 18.8%, consumer staples 14.1%, industrials 13.1%, consumer discretionary 8.8%, utilities 8.6%, materials 8.2%, information technology 7.7%, energy 6.5%, telecom 4.8% and health are 1.9%.