With the MSCI Emerging Markets Index (MXEF) higher by almost 5% over the past month, advisors may be rethinking allocations to developing economies.
An array of portfolios within WisdomTree’s series of Modern Alpha ETF Model Portfolios feature emerging market exposure via a variety of ETFs. One of the cornerstones of the emerging market of some of those model portfolios is the WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (XSOE ).
XSOE seeks to track the price and yield performance of the WisdomTree Emerging Markets ex-State-Owned Enterprises Index. Under normal circumstances, at least 80% of the fund’s total assets will be invested in component securities of the index and investments that have economic characteristics that are substantially identical to the economic characteristics of such component securities. The index is a modified float-adjusted market cap weighted index that consists of common stocks in emerging markets, excluding common stocks of “state-owned enterprises.”
“For emerging markets, many of our strategic model portfolios and core allocations are anchored with a growth-tilted core emerging markets holding—the WisdomTree Emerging Markets ex-Stated-Owned Enterprises Fund (XSOE ),” said WisdomTree Research Director Jeremy Schwartz in a recent note.
State-owned enterprises (SOEs) are common in emerging markets strategies and are often prominent in three sectors – energy, financial services and materials – through telecom and utilities, in some markets, have their share of SOEs, too.
In other words, traditional emerging markets benchmarks that are heavily allocated to those sectors make it difficult for advisors to source growth. Data confirm sector differences are meaningful contributors of XSOE’s out-performance of traditional emerging markets indexes.
“The allocation impact from sector deviations only represented 80 bps of the 354-bp total outperformance. Stock selection, and better returns within the sectors, was a key driver,” according to Schwartz. “This is the impact from WisdomTree’s methodology removing SOEs, as both indexes follow a generally market capitalization-weighted approach.”
By eliminating state-run companies, XSOE features scant exposure to banks and energy stocks. By excluding state-controlled firms, the WisdomTree Emerging Markets ex-State-Owned Enterprises Fund ratchets up exposure to the emerging markets consumer story.
“In our view the decade ahead is unlikely to see the U.S. continue its major outperformance,” said Schwartz. “Emerging markets represent one of the global growth stories we see over the long run. To capitalize on this potential, we’d advocate for a growth-tilted core like XSOE.”