Emerging markets equities are showing some signs of life, potentially spotlighting opportunities with ETFs, such as the FlexShares Morningstar Emerging Markets Factor Tilt Index Fund (NYSEArca: TLTE).
Factor-based strategies like smart beta ETFs can be used to solve different portfolio needs. For instance, single factors help target exposure to enhance returns or address specific client needs, whereas a multi-factor approach may provide a diversified core equity allocation that leverages the benefits of multiple factors and limit cycle risks associated with individual factors.
TLTE’s large weight to China, one of this year’s best-performing major equity markets, could be a boon for patient investors.
“Over the medium term, however, the effects of China’s large fiscal boost to the economy should feed through to the rest of the region and the dominance of Asia, and in particular of Chinese technology, should reassert itself,” according to BNP Paribas.
Time for TLTE
ETFs have gravitated toward low-cost, pure beta investments for years, but many are beginning to warm up to smart beta or factor-based strategies that aim to enhance returns and limit downside risks.
TLTE 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.
“Valuations are a further factor in favor of emerging markets. The price-book ratio of the MSCI EM index relative to that of the MSCI World index is near the lows since 2003. For the IT sector, relative multiples have rarely been this low since the tech bubble in the late 1990s,” notes BNP Paribas. “On a price-to-next-twelve-month (NTM) earnings basis, relative multiples are similarly near levels not often seen since 2005 after which there was an extended period of EM outperformance.”
After categorizing companies based on market cap, TLTE assigns a value score based on price/book ratio, price/earnings ratio, price/cash flow ratio, price/sales ratio, and dividend yield. Selected securities are then divided by thirds into the following categories: value, core, and growth—all applied to the market cap categories—large cap, mid cap, and small cap allocations.
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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.