Active Managers Can Expose Opportunities in Emerging Markets

With the coronavirus pandemic taking hold of the global markets, it might seem like investors wouldn’t touch emerging markets (EM) with a 10-foot pole. However, EM at its current state can expose opportunities for active managers who are willing to deftly navigate the risk.

“Emerging-markets stocks rank among the world’s riskiest,” wrote Daniel Sotiroff in Morningstar. “But they also have greater potential to be mispriced. That creates opportunities for active managers to deliver better performance than a market-cap-weighted index fund.”

“A stock market’s capacity to accurately price shares relies on a wide range of opinions about an underlying company’s true value,” Sotiroff added. “Its participants also require the ability to express those opinions through the price at which they transact. Any restrictions, whether they limit the degree of participation or inhibit trades from occurring, can cause a stock’s price to deviate from the underlying company’s true value.”

Where can investors find actively managed exchange-traded fund (ETF) opportunities? Investors who are interested in targeting EM countries with strong fundamentals and are wary of further foreign exchange currency risks can look to something like the WisdomTree Emerging Markets Multifactor Fund (NYSEArca: EMMF).

EMMF seeks returns via ta transparent actively-managed strategy that invests in emerging market equity securities that have the highest potential for returns based on proprietary measures of valuation, quality, momentum and volatility reduction factors. The ETF also manages currency risk through a dynamic currency hedging strategy based on exposure to currencies showing weaker momentum.

A Relative Value Play for EM Strength

For investors looking for the continued upside in emerging market assets, whether driven by a weakening USD or continued developments around trade, the Direxion MSCI Emerging Over Developed Markets ETF (NYSEArca: RWED) offers them the ability to benefit not only from emerging markets potentially performing well but from emerging markets outperforming developed markets.

RWED seeks investment results that track the MSCI Emerging Markets IMI – EAFE IMI 150/50 Return Spread Index. The Index measures the performance of a portfolio that has 150 percent long exposure to the MSCI Emerging Markets IMI Index and 50 percent short exposure to the MSCI EAFE IMI Index.

On a monthly basis, the Index will rebalance such that the weight of the Long Component is equal to 150% and the weight of the Short Component is equal to 50% of the Index value. In tracking the Index, the Fund seeks to provide a vehicle for investors looking to efficiently express an emerging over developed investment view by overweighting exposure to the Long Component and shorting exposure to the Short Component.

For more market trends, visit ETF Trends.