For some time now, Chinese stocks have been the primary drags on exchange traded funds with exposure to multiple countries. Those are the risks when many of the pure beta ETFs in this category devote 30% or more of their respective weights to Chinese equities. As a result, many have turned to ex-China ETFs. These exclude Chinese stocks while maintaining exposure to multiple other developing economies and emerging markets.
That strategy works when Chinese equities falter. However, it also runs the risk of leaving investors under-allocated should stocks in the world’s second-largest economy rebound.
The WisdomTree Emerging Markets Multifactor Fund (NYSEArca: EMMF) is a credible consideration for market participants looking to split the difference between ex-China and traditional emerging markets ETFs. EMMF is proving its worth. Year-to-date, the fund is up 4.05% and higher by 18.17% over the past year. Over those same timeframes, the MSCI Emerging Markets Index is down 0.17% and up just 0.0.5%.
Evaluating EMMF’s Secret Sauce
EMMF will turn six years old in August. The ETF has been around for a period of emerging markets equity struggles. That could also signal that the fund has been underappreciated relative to its more traditional counterparts.
Some of that appreciation should come in the form of EMMF not outright ditching China, but rather capitalizing on a unique weighting methodology to keep exposure to that country tame. Currently, China is merely the fourth-largest country weight in EMMF, trailing India, Taiwan, and South Korea. The fund’s 9% weight to China is significantly underweight relative to standard cap-weighted funds in this group.
EMMF attempts to outperform rival products by identifying stocks “with the highest composite scores based on two fundamental factors, value and quality measures, and two technical factors, momentum, and correlation,” according to WidsomTree.
In part, that methodology has led EMMF to sport a more than 47% allocation to Indian and Taiwanese stocks. That’s a big bet on just two countries, but it’s one that’s paid off for EMMF investors. Over the past three years, Indian and Taiwanese equities have sharply outperformed the MSCI Emerging Markets with Indian shares doing so with less annualized volatility as measured by the MSCI India Index.
Additionally, EMMF’s implementation of the quality factor can act as a volatility-reducer – always a favorable trait when it comes to emerging markets stocks and one that could be particularly useful at a time when many members of these assets are struggling to fit the quality bill.
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