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.