ETF Trends
ETF Trends

Investors looking for alternatives to traditional market cap-weighted emerging markets ETFs have a growing number of funds to consider. Those looking for smart beta, factor-based approach can consider the Deutsche X-trackers FTSE Emerging Comprehensive Factor ETF (NYSEArca: DEMG).

Some analysts believe emerging markets stocks can continue delivering upside for investors. However, there are some risks to be mindful of. Historical data points indicate the current bull market in emerging markets stocks could last awhile.

For its part, DEMG is up 16% year-to-date and has the potential to deliver more upside while helping investors gain exposure to value and quality stocks.

Discounted valuations, especially in an environment where U.S. equities are trading near record levels, provide a relatively attractive opportunity for investors. Even after the strong start to this year, current price-to-earnings ratio of MSCI EM is around 15.1, compared to the 22.2 for MSCI USA Index. DEMG follows the FTSE Emerging Comprehensive Factor Index.

Looking at the Deutsche Asset Management’s factors, the quality factor helps hone in on the quality of a company earnings as a better gauge of future earnings performance. The underlying indices may provide a quantifiable measure of each company’s profitability, efficiency, earnings quality and leverage.

Emerging markets equities still trade at a discounts relative to U.S. benchmarks, but the utility of the quality factor in the developing world cannot be understated. Historically, when emerging markets stocks decline, it is lower quality names driving those declines. DEMG’s emphasis on quality can help investors capture emerging markets upside while potentially limiting downside.

Home to 711 stocks, DEMG uses a multi-factor approach that also encompasses low volatility, momentum and size in addition to quality and value.

Related: A Surging Smart Beta Small-Cap ETF

Although emerging markets exchange traded funds are among this year’s most prolific asset gatherers in the U.S., some market observers argue that emerging markets equities are under-owned by big investors and that the asset class has more room to rally. The weaker dollar is helping as well.

DEMG allocates a quarter of its combined weight to financial services and industrial names while the materials and technology sectors combine for 21%. Consumer stocks have been key contributors to emerging markets upside this year and DEMG offers some exposure to that theme with the two consumer sectors accounting for over 15% of the fund’s roster.

For more on smart beta ETFs, visit our Smart Beta Channel.

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.