Emerging markets (EM) are coming off a much-needed rally in August after Covid-19 threw a wrench into their plans—much like most areas of the capital markets. Can we expect more of the same in the early going of September?

Playing a large hand in the success of the EM space will be the U.S. central bank. Per a Bloomberg report, “when Federal Reserve Chairman Jerome Powell signaled policymakers will remain accommodative for longer through more tolerance of inflation, a stance that drove U.S. stocks to fresh records and the dollar lower as real yields declined. All of which provided renewed support for emerging markets.”

“That’s going to bode well both for emerging-market currencies — and credit as well,” said Ali Malik, an investment adviser at Bank of Singapore. “We’re dollar bears.”

Another major piece of the EM success puzzle will be relations between the U.S. and China. This is even more apparent with the U.S. 2020 Presidential Election in tow.

“The U.S.-China relationship will be under the microscope as we now enter the final leg of the campaign,” said Phoenix Kalen, an emerging-market strategist at Societe Generale SA in London. “With many market participants anticipating that Donald Trump will use an anti-China stance to appeal to U.S. voters, investors will be very interested in observing if there is a rise in U.S.-China trade and geopolitical tensions.”

^MSEM Chart

^MSEM data by YCharts

ETF Exposure to Emerging Markets

For broad exposure to emerging markets, ETF investors can take a look at the FlexShares Morningstar Emerging Markets Factor Tilt Index Fund (TLTE). The fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Morningstar® Emerging Markets Factor Tilt IndexSM.

The index is designed to reflect the performance of a selection of companies that, in aggregate, possess greater exposure to size and value factors relative to the Morningstar Emerging Markets Index, a float-adjusted market-capitalization weighted index of companies incorporated in emerging-market countries. The fund will invest at least 80% of its total assets in the securities of the index and in ADRs and GDRs based on the securities in the index.

Another fund is the FlexShares Emerging Markets Quality Low Volatility Index Fund (QLVE). QLVE seeks investment results that correspond generally to the price and yield performance of the Northern Trust Emerging Markets Quality Low Volatility IndexSM, which is designed to reflect the performance of a selection of companies that, in aggregate, possess lower overall absolute volatility characteristics relative to a broad universe of securities domiciled in emerging market countries.

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