Emerging markets investors have to cheer Federal Reserve Chairman Jerome Powell after he essentially left the door open for an interest rate policy that could see rate cuts before the end of 2019. 2018 saw four interest rate hikes which helped decimate the emerging markets (EM) space, but 2019 thus far has been a year of redemption and more strength could be on the way if analysts are correct in forecasting an interest rate cut by year’s end.
An investor may want the international diversification of emerging markets, but trade wars may have them less apt to touching them even with a 10-foot pole in hand. However, investors looking at the EM space for opportunities can identify funds that incorporate smart beta into their strategies
While trade wars could be a prolonged affair, it opens up opportunities to purchase equities at a substantial discount like emerging markets exchange-traded funds (ETFs). One fund to consider is the Xtrackers FTSE Emerging Comprehensive Factor ETF (NYSEArca: DEMG).
A good majority of investors were driven away by the red prices in emerging markets (EM) during much of 2018. However, savvy investors who were quick to see the opportunity viewed EM as a substantial markdown. However, from a fundamental standpoint, low price-to-earnings ratios in emerging markets ETFs have made them prime value plays as capital inflows continue in 2019.
During May as a U.S.-China trade deal began to take a turn for the worse, risk-off was the prevailing sentiment, but hopes of a rate cut might be fueling more risk-on–at least for now.
As for DEMG, it seeks investment results that correspond generally to the performance, before fees and expenses, of the FTSE Emerging Comprehensive Factor Index. The index is designed to provide core exposure to emerging market equities based on five factors – Quality, Value, Momentum, Low Volatility and Size.
Companies are weighted based on their relative exposure to all of the aforementioned factors. Companies that do not exhibit the necessary characteristics are not eligible for inclusion in the fund. DEMG uses a representative sampling indexing strategy to track the index, meaning it generally will invest in a sample of securities in the index whose risk, return and other characteristics resemble the risk, return and other characteristics of the index
Furthermore, Investors are increasingly emphasizing low cost a prime motivator for allocating capital in 2019, which makes ETFs like DEMG an attractive option. The fund provides smart beta EM exposure at a paltry 0.35 percent expense ratio.
As such, a smart beta play in EM like DEMG could be the best alternative in today’s market environment.
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