Getting Smart (Beta) When It Comes to Emerging Markets Investing

While most investors might have been driven away by the red prices in emerging markets (EM) during much of 2018, savvy investors who were quick to see the opportunity viewed EM as a substantial markdown. 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.

Ongoing U.S.-China trade negotiations and geopolitical tensions put emerging markets in a state of unease in 2018, but investors can now look to their resurgence through other broad-exposure ETFs like the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) or iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG).

Investors are increasingly emphasizing low cost a prime motivator for allocating capital in 2019, which makes ETFs like IEMG an attractive option. The fund provides this core EM exposure at a paltry 0.14 percent expense ratio.

Other investors might want to only look at the cream of the crop in EM for initial exposure, which makes China the best alternative. For example, Xtrackers Harvest CSI 300 China A ETF (NYSEArca: ASHR) provides a way for investors to gain exposure to China’s biggest and best equities.

While investors are sifting through the plethora of opportunities the EM space has to offer, more advanced investors and short-term traders investors might look to play EM’s strength over developed markets.

Nonetheless, a changing emerging markets landscape through the rest of 2019 also calls for strategic exposure. Investors may be cautious with emerging markets given their historical doldrums despite their rebound in 2019.

“I think many advisors are still in the hesitation or caution mode, given risks in emerging markets,” said Todd Mathias, Vice President, ETF Specialist, Franklin Templeton. “And that could be looming tariffs is one that comes up often, but I think there’s a, a sense of renewed optimism. And a lot of that is on the back of kind of the change in the Fed [US Federal Reserve] policy, where the US dollar sits relative to emerging market currencies and allows us to refocus on two kinds of key areas.”

Investors can allay their tepidness when it comes to emerging markets via smart beta strategies. However, smart beta strategies may result in more hesitance, particularly if the investor doesn’t know what’s involved in these methodologies.

As such, more education is needed when it comes to smart beta investing. Mathias provides a distinct definition.

“What’s new is now you have this third style of investing, smart beta-the ability to capture those factors within a rules-based transparent design,” said Mathias. “And that’s smart beta.”

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