Domestically, the equities rally has been dominated by large cap technology companies. However, there’s also market strength to be had overseas, especially in emerging markets.
An Institutional Investor article summarized the recent strength in small cap EM equities, noting that MSCI Emerging Markets Small Cap Index delivered a 17.7% gain for the year by the end of July. Compare that to the MSCI Emerging Markets Large Cap Index, which delivered an 11.4% gain within the same timeframe.
“In the U.S., you have such a narrow focus on leaders… That’s really unhealthy because there’s just no breadth in the market,” said Patrick McDonough, portfolio manager at PGIM Quantitative Solutions. “That means there’s no diversification, and the capital is being blind and not really being used efficiently.”
A Pair of EM Funds Worth Considering
If small caps might invoke thoughts of too much volatility when considering to allocate capital into EM assets, investors may want to consider the Invesco S&P Emerging Markets Low Volatility ETF (EELV). The fund seeks to track the investment results of the S&P BMI Emerging Markets Low Volatility Index, which is designed to measure the performance of 200 of the least volatile stocks of the S&P Emerging Plus LargeMidCap Index. As such, the fund offers a mix of about 70% in large caps and 30% in mid-caps for a balance of growth and value.
Another fund that eschews small caps in favor of large cap companies in EM countries is the Invesco FTSE RAFI Emerging Markets ETF (PXH). Furthermore, PHX emphasizes fundamentals. It focuses on a market cap-style allocation that favors large cap value. And there’s a blended approach to value/growth in large cap EM companies.
Per its fund description, PXH seeks to track the investment results of the FTSE RAFITM Emerging Index. This Index is designed to track the performance of securities of companies domiciled in emerging market countries with the highest-ranking cumulative score. They are selected from the constituents of the FTSE Emerging All Cap Index, as determined by the index provider. As mentioned, the focus is on fundamentals. So, the index is designed to track the performance of the largest emerging market equities. Those are selected based on the following four fundamental measures of firm size: book value, cash flow, sales, and dividends.
Additionally, income seekers will find that both funds offer a quarterly distribution. EELV has a 12-month distribution rate of 3.22%, while PXH has a 12-month distribution rate of 4.83%.
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