Investing in emerging markets has seen many challenges this year, from the war in Ukraine to a strong U.S. dollar to regulatory crackdowns in China. Despite these headwinds, emerging markets fundamentals are in a good position, especially as higher commodity prices have improved the terms of trade for commodity-exporting countries. In fact, not only the current account and fiscal balances for many countries have improved, but valuations for many companies in emerging and developing markets have also grown more attractive.
“Compared to the developed world, emerging markets equities have held up better this year, and we believe that this could be an attractive entry point for investors to (re)gain exposure to the asset class,” according to Lazard Asset Management. “Emerging markets, which offer access to higher economic growth, are trading at a 30% valuation (price to earnings) discount to developed markets while offering investors a higher dividend yield, a higher free cash flow yield, and a return on equity profile that has been improving since the end of 2020.”
The Invesco S&P Emerging Markets Low Volatility ETF (EELV ) has been very popular with investors this year, bringing in nearly $1 billion (specifically, $957.1 million) in investor capital year-to-date as of June 30, according to data from VettaFi. The fund seeks to track the investment results of the S&P BMI Emerging Markets Low Volatility Index. S&P Dow Jones Indices LLC compiles, maintains, and calculates the underlying index, which is designed to measure the performance of 200 of the least volatile stocks of the S&P Emerging Plus LargeMidCap Index.
“Emerging market investments are known to exhibit a fair amount of volatility, which wards some risk-averse investors away from their potential gains,” according to VettaFi’s analyst report on the fund. “EELV seeks to eliminate that gap by offering a methodology that chooses low volatility emerging market stocks.”
EELV offers EM exposure without the same level of risk while providing downside protection. It’s also underweighted China and not heavily weighted towards technology stocks, which has also served the fund well.
“EELV is constructed differently than many emerging markets ETFs, with its focus on lower-risk stocks,” said Todd Rosenbluth, head of research at VettaFi. “Rather than being heavily weighted to China, the ETF recently had high exposure to Taiwan, Thailand, and Saudi Arabia.”
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