Count the Goldman Sachs ActiveBeta Emerging Markets Equity ETF (NYSEarca: GEM) among the emerging markets exchange traded funds that are in rally mode. Now up about 15% year-to-date, GEM hit a record high in Tuesday’s U.S. trading session.
GEM tries to reflect the performance of the Goldman Sachs ActiveBeta Emerging Markets Equity Index, which includes exposure to developing market stocks but selects components based on good value, strong momentum, high quality and low volatility. The ETF debuted in September as one of the original member of Goldman’s suite of “ActiveBeta” ETFs.
As of May 1, GEM had over $1.2 billion in assets under management, making it one of the fastest-growing smart beta emerging markets strategies on the market today. GEM has more than doubled in size the start of 2016.
GEM’s country weights are not unfamiliar to investors in traditional emerging markets ETFs. For example, GEM’s top three geographic exposures are China, South Korea and Taiwan. Those countries combine for over 53% of GEM’s lineup. India, Brazil and South Africa combine for about a quarter of GEM’s roster.
Ongoing reforms, notably from the supply side, could further support Chinese economic growth. Reforms have bolstered industrial profitability and strengthened commodity prices. China’s exporters are also enjoying improvements from a rebound in global trade.
The Chinese economy is also shifting towards domestic-oriented consumption as a main growth driver. Consequently, consumption-driven sectors like technology and services are becoming a growing component in the economy.
Compared to some traditional emerging markets ETFs, GEM’s sector mix is compelling as the ETF devotes almost 21% of its weight to technology stocks, one of the fastest-growing segments in developing economies. That is followed by a 19.3% weight to financial services names. GEM also features solid consumer exposure as discretionary and staples names combine for about 20% of the ETF’s lineup.
Although some developing economies have been viewed as vulnerable to Donald Trump’s presidency and there are concerns about the impact of interest rate increases by the Federal Reserves on emerging markets that have to service dollar-denominated debt, some market observers believe emerging equities can perform well again in 2017.
GEM charges 0.45% per year, or $45 on a $10,000 investment. That is pricier than many cap-weighted emerging markets ETFs, but reasonable among smart beta emerging markets funds.
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