Tilt Towards Value Factor in Emerging Markets Using the “TLTE” ETF

Value—it’s available in the capital markets for those willing to do the work and find that diamond in the rough—certainly a tough task when it comes to emerging markets (EM). While the coronavirus pandemic put on the heavy gloves against EM assets in March, there are still value plays to be had, but it can all be done in one fund—the FlexShares Morningstar Emerging Markets Factor Tilt Index Fund (TLTE).

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.

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. At the heart of the fund lies its strategy that uses a factor tilt process.

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.

As of July 3, the top sectors in the fund include financials, technology and consumer discretionary. The top 10 holdings include some familiar names like Samsung Electronics and Tencent Holdings—mainstays in Asia.

Risk On Back in EM

EM funds like TLTE can certainly benefit if emerging countries can return to normal with respect to their economies. That said, investors will need to keep a close watch on impactful data, such as inflation.

As a Bloomberg article noted, there are money management firms that “are questioning whether the developing world’s economic troubles will be short-lived as massive central-bank stimulus bolsters demand for risky assets. Emerging-market dollar bonds posted their longest weekly winning streak since February in the five days through Friday, while stocks and currencies had their best performance in a month.”

“Inflation data in at least 10 developing economies, including Russia and Mexico, will provide clues on how much more room there is for policymakers to reduce interest rates, with many already at record lows. Malaysia’s central bank will likely cut borrowing costs this week, while Peru and Israel will probably remain on hold,” the article noted further.

EM equities are typically tied to the performance of their currencies, so that’s another factor to watch.

“We are mainly focused on tracking mobility data to gather how different the pace of recovery is from country to country as we believe this will influence the level of attractiveness of the individual currencies,” said Anders Faergemann, a London-based portfolio manager at PineBridge, which manages about $96 billion. “We expect some central banks will continue to cut interest rates, but the bulk of rate cuts are behind us.”

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