Tailored Approach to Emerging Markets Warranted in Current Climate | ETF Trends

Standard emerging markets strategies are lagging again this year, but there remain compelling opportunities in developing economies that are accessible with the right approaches.

A prime avenue for advisors looking to avoid emerging markets disappointment is with the WisdomTree Emerging Markets Multi-Factor Model Portfolio, which is part of WisdomTree’s Modern Alpha lineup of model portfolios.

“This model portfolio is designed for investors with a long-term horizon looking for exposure to a broad universe of Emerging Market equities primarily using factor focused ETFs,” according to WisdomTree. “The selected ETFs provide certain factor tilts that have the potential to generate excess return relative to comparable cap-weighted benchmarks over longer-term holding periods. The strategies may use both WisdomTree and non-WisdomTree ETFs.”

Exclusions Matter

A key advantage with this model portfolio is several of the ETFs on the roster make it a point to avoid companies that are intimately tied their home country governments, or state-owned enterprises (SOEs). Historical data confirm that emerging markets outcomes typically improve when SOEs are skirted.

“Companies influenced by government decisions often don’t put profits first, Siddarth Kapoor, CEO of Silver Mount Capital, told CNBC,” reports the network. “With China, India and other emerging market nations playing a more active role in corporate affairs, the risk could be that there will be a misalignment in interests with shareholders over time.”

Avoiding state-controlled companies is made easier with the WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (NYSEArca: XSOE).

XSOE seeks to track the price and yield performance of the WisdomTree Emerging Markets ex-State-Owned Enterprises Index. Under normal circumstances, at least 80% of the fund’s total assets will be invested in component securities of the index and investments that have economic characteristics that are substantially identical to the economic characteristics of such component securities. The index is a modified float-adjusted market cap weighted index that consists of common stocks in emerging markets, excluding common stocks of “state-owned enterprises.”

XSOE accounts for 40% of the aforementioned model portfolio and is proving to be a difference-maker for advisors and investors this year.

“Funds that strip out these types of companies such as the XSOE WisdomTree Emerging Markets ETF have performed far better. The XSOE ETF has added 10% so far this year compared with the 1% gain on the EEM ETF,” according to CNBC.

For more on how to implement model portfolios, visit our Model Portfolio Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.