With the MSCI Emerging Markets Index up more than 18% this year, investors are revisiting traditional emerging markets exchange traded funds. However, there are some compelling smart beta options to consider in the emerging markets space.
That includes the Schwab Fundamental Emerging Markets Large Company ETF (NYSEARCA:FNDE). FNDE is rapidly becoming one of the dominant names among smart beta emerging markets ETFs, an asset class usually dominated by plain vanilla cap-weighted funds.
FNDE tracks the Russell Fundamental Emerging Markets large Company Index, which selects, ranks and weights components based on fundamental factors like adjusted sales, retained operating cash flow and dividends plus buybacks.
“FNDE follows the fundamentally weighted Russell RAFI Emerging Markets Large Company Index, giving investors an alternative to traditional emerging markets ETFs. That also means a different look at the country level,” reports InvestorPlace. “For example, Brazil and Russia — two of the most volatile emerging markets — combine for almost 29% of FNDE’s weight compared to just 9.5% of the MSCI Emerging Markets Index. As a result, this ETF’s three-year standard deviation — a key volatility metric — is 430 basis points higher than what is found on the MSCI Emerging Markets Index.”
FNDE charges 0.4% per year, or $40 on a $10,000 investment. While many cap-weighted emerging markets ETFs are less expensive than that, FNDE is cost-friendly relative to competing smart beta emerging markets strategies. Plus, Schwab clients can trade the fund commission-free.
Related: Factor Investing: What is the Right Number of Factors?
“Emerging market investors concentrate their assets in a few ETFs because investors shy away from factors when analyzing emerging markets and because low trading volume keeps investors in familiar names. These two causes have a chicken-or-egg quality about them. If more investors focused on smart beta factors, then volume would be higher. If volume rose, more investors would use emerging market smart beta ETFs,” according to CLS Investments research.
While investors have shown a preference for the prosaic with emerging markets ETFs, FNDE is undoubtedly successful as highlighted by its $1.3 billion in assets under management. The ETF turns four in August.
For more on smart beta ETFs, visit our Smart Beta Channel.