Emerging markets have the potential to offer outsized returns, but many investors may find the inherent volatility of the asset class hard to stomach.
Investors can navigate volatility in emerging markets by looking beyond traditional cap-weighted funds. Multifactor ETFs may enhance returns and help mitigate some risk traditionally associated with emerging markets.
Emerging markets are important because they can help investors diversify portfolio risk. This is particularly important now, as market uncertainty remains at the top of many people’s minds. Challenging home country bias is an effective way to enhance diversification, as international stocks do not contend with many of the same issues as the U.S.
For example, emerging markets tend to be better prepared to deal with inflation and higher rates. These economies have dealt with inflation more frequently than developed markets over the past 25 years.
How Multifactor ETFs Can Potentially Add Value & Mitigate Volatility
Advisors can enhance diversification while preparing portfolios for higher volatility by allocating to an emerging market multifactor ETF. Multifactor ETFs seek to target desired return-enhancing factors and reduce exposure to unrewarded risk exposures.
Fidelity’s Multifactor ETF suite offers exposure to four factors within a single strategy. Companies included within each Fidelity Multifactor Index demonstrate a high level of quality alongside attractive valuations. Included companies must also exhibit positive momentum signals and relatively lower volatility than the broader market.
As a result, the Fidelity Emerging Markets Multifactor ETF (FDEM ) provides access to emerging market companies that offer exposure to the quality, low volatility, momentum, and value factors.
FDEM seeks to track the Fidelity Emerging Markets Multifactor Index℠. The index selects stocks from the top 1,000 emerging markets companies by float-adjusted market cap. Importantly, the index reallocates 25% of the portfolio to sectors that are the least correlated to the S&P 500 at each rebalance.
For more news, information, and analysis, visit the ETF Investing Channel.
Fidelity Investments® is an independent company, unaffiliated with VettaFi. There is no form of legal partnership, agency affiliation, or similar relationship between VettaFi and Fidelity Investments. Nor is such a relationship created or implied by the information herein. Fidelity Investments has not been involved with the preparation of the content supplied by VettaFi. It does not guarantee, or assume any responsibility for its content.
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