Smart Beta Applied to Emerging Markets with DEMG ETF

While the U.S.-China trade deal saga could be a protracted affair, it opens up opportunities to purchase equities at a substantial discount like emerging markets exchange-traded funds (ETFs) like 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.

Current weakness in emerging markets could portend to a buying-on-the-dip opportunity for investors willing to assume the risk. Right now, though, it seems risk-off is the prevailing sentiment.

“At the moment Trump’s comments that he’s in no rush to make a deal with China is definitely still a dominating factor for this tentative risk-off sentiment in the EM space,” said Simon Harvey, FX analyst at Monex Europe.

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.

DEMG 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

According to the IMF, the world economy will grow at a 3.3 percent pace, which is 0.2 percent lower versus the initial forecast in January. Nonetheless, strength in leading markets like the U.S. with its healthy labor market are keeping global growth afloat.

Right now, investors are averse to EM funds as the uncertainty of a trade deal is keeping them in a seemingly perpetual guessing game. EPFR Global data showed that emerging market stocks lost $3.8 billion in the weekend ending May 23 and outflows totaling almost $8 billion in five consecutive weeks.

Smart Beta Applied to Emerging Markets with the "DEMG" ETF 1

As such, a smart beta play in EM like DEMG could be the best alternative in today’s market environment.

For more market trends, visit ETF Trends.