The first quarter was not kind to developing economies and their equity markets as the MSCI Emerging Markets Index slid 17.56%, but investors looking to revisit the asset class may want to look the Nationwide Maximum Diversification Emerging Markets Core Equity ETF (MXDE) as a possible rebound idea.
MXDE seeks to track the total return performance of the TOBAM Maximum Diversification Emerging Index.
Under normal circumstances, at least 80% of the fund’s total assets will be invested in the 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 designed to create a more diversified equity portfolio of the common and preferred stock of companies in emerging markets relative to traditional market capitalization-weighted benchmarks.
MXDE, which recently turned two years old, employs a unique methodology relative to cap-weighted funds in this category. The fund’s index, TOBAM, applies liquidity and socially responsible investment (SRI) screens in determining the investable universe. Based on a patented, proprietary mathematical formula, the TOBAM Diversification Ratio, TOBAM weights individual stocks to minimize the correlations among holdings, resulting in the creation of the “most diversified portfolio,” given a 50% active share constraint.
MXDE “seeks higher risk-adjusted returns relative to market cap-weighted strategies by creating a more diversified risk allocation designed to capture the full equity risk premium,” according to Nationwide.
The weighted average market value of MXDE’s components is about $9.5 billion, which is significantly lower than is found in traditional emerging markets funds while putting the Nationwide ETF in mid-cap territory.
The mid-cap category has also outperformed their larger peers, but with lower volatility than small caps. Moreover, the returns of mid-cap stocks have also beaten those of small-cap stocks during the trailing three-, five-, and 10-year periods, with lower volatility.
MXDE also presents a value proposition for investors willing to stomach the volatility that could ensue as trade war news continues to inundate investors. In essence, investors should look at emerging markets exposure as discounted diversification.
Home to 307 stocks, MXDE allocates over 79% of its weight to Asian economies. While there’s a value tilt in the fund, it offers growth exposure, too, as the consumer cyclical, communication services and technology sectors combine for about a third of the fund’s weight.
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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.