For instance, the Legg Mason Emerging Markets Diversified Core ETF (NasdaqGM: EDBI) through a partnership with QS Investors 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.[related_stories]
The result is an emerging market ETF with a more balanced allocation across macro drivers. Specifically, among its top country weights, EDBI only includes a 13.4% tilt toward China, followed by Malaysia 9.3%, India 8.9%, Turkey 7.8% and South Africa 7.1%. Additionally, while financials are still a major component, the financials sector only makes up 15.9% of EDBI’s portfolio.
The indexing methodology has proven effective this year, with EDBI up 5.5% year-to-date while the MSCI Emerging Markets Index gained 2.7%.
Potential investors should be aware that the fund is still relatively new and has accumulated $6.6 million in assets under management. Nevertheless, Brandon Clark, Director & Product Manager at Legg Mason Global Asset Management, reminded financial advisors that executing large trade orders in EDBI can still be done effectively.
“ETF liquidity is different than stock liquidity, so the traditional rules do not apply,” Clark said. “The underlying basket is always the base of an ETF’s liquidity. The average daily volume in lower volume ETFs is less informative of real liquidity.”
Clark explained that financial advisors can work large orders through a block desk. Traders would work directly with market makers who have various ways to source liquidity. Additionally, investors should consider using limit orders and marketable limit orders to better control trades.
Financial advisors who are interested in learning more about the emerging markets can watch the webcast here on demand.