Are Quantitative Strategies More Effective in Emerging Markets?

Based on Morningstar data, the majority of smart beta exchange-traded funds (ETFs) have 10 times more exposure to developed markets versus emerging markets. However, that’s not to say it’s because smart beta strategies like those utilizing quantitative methodologies are less effective in emerging markets.

Per an article in Barron’s, “the MSCI Emerging Markets Index generated an annualized return of 16.7% from 1988 through 2017, while the broader index returned an average of 11.4%. That five-percentage-points outperformance is even better than that in developed markets.”

Investors looking to utilize smart beta strategies or even get the best broad-based exposure in EM can use China as a viable starting point.

China released its second-quarter figures recently, which revealed that its economy slowed to 6.2 percent, which represents its weakest rate in at least 27 years. The primary culprit for the slowdown was unsurprisingly the U.S.-China trade war as negotiations took a turn for the worse in the month of May.

Between April and June, however, China’s economy actually grew 6.2 percent compared to a year ago, according to the country’s statistics bureau. That figure fell in line with the expectations of analysts polled by Reuters, but less than the 6.4 percent year-on-year growth in the first quarter of 2019.

China Could Mimic U.S. Rate Cuts

With Federal Reserve Chairman Jerome Powell paving the way for rate cuts during his testimony to Congress, China’s central bank could essentially follow suit as it must react to its slowing economy. The Chinese economy is languishing amid a trade war with the U.S. Looser monetary policy would put less pressure on China’s central bank to ease monetary policy.

For exchange-traded fund (ETF) investors looking to get a piece of China, A-Shares represent the country’s biggest and best equities. Furthermore, they represent pure-play opportunities as China continues to expand access to its markets.

“Some argue that quantitative strategies, which seek to take advantage of human biases, should do better in emerging markets, where knowledge gaps and market inefficiencies are arguably more abundant,” the Barron’s article wrote. “Take Chinese A shares. According to the Shanghai Stock Exchange Factbook of 2018, retail investors contributed 80% of A shares’ trading volume in 2017, but took just 10% of the total profits.”

Here are three A-Shares ETFs to consider:

  1. Xtrackers CSI 300 China A-Shares ETF (NYSEArca: ASHR)–up 32.60 percent: seeks investment results that correspond generally to the performance, before fees and expenses, of the CSI 300 Index. The fund will normally invest at least 80% of its total assets in securities of issuers that comprise the underlying index. The underlying index is designed to reflect the price fluctuation and performance of the China A-Share market and is composed of the 300 largest and most liquid stocks in the China A-Share market. The underlying index includes small-cap, mid-cap, and large-cap stocks.
  2. Xtrackers CSI 500 China A-Shares Small Cap ETF (NYSEArca: ASHS)–up 32.56 percent: seeks investment results that correspond generally to the performance, before fees and expenses, of the CSI 500 Index. The index is designed to reflect the price fluctuation and performance of small-cap companies in the China A-Share market and is composed of the 500 smallest and most liquid stocks in the China A-Share market. Under normal circumstances, the fund invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in A-Shares of Chinese small-cap issuers or in derivative instruments and other securities that provide investment exposure to A-Shares of Chinese small-cap issuers.
  3. Xtrackers MSCI China A Inclusion Equity ETF (NYSEArca: ASHX)–up 30.80 percent: The investment seeks investment results that correspond generally to the performance, before fees and expenses, of the MSCI China A Inclusion Index. The fund will normally invest at least 80% of its total assets in securities (including depositary receipts in respect of such securities) of issuers that comprise the underlying index. The underlying index is designed to track the equity market performance of China A-Shares that are accessible through the Shanghai-Hong Kong Stock Connect program or the Shenzhen-Hong Kong Stock Connect program.

For more investing trends, visit ETFtrends.com.