Emerging markets have the potential to offer outsized returns, but many investors are understandably wary of the volatility of the asset class.
Investors can navigate volatility in emerging markets by looking beyond traditional cap-weighted funds. Instead, investing in multifactor ETFs can enhance returns and help mitigate some risk traditionally associated with emerging markets.
See more: Emerging Markets Better Positioned in Above Trend Inflation
Two funds to consider that offer EM exposure, targeting value stocks, include the Hartford Multifactor Diversified International ETF (RODE ) and the Hartford Multifactor Emerging Markets ETF (ROAM ).
ROAM offers broad exposure to emerging market equities. Meanwhile, RODE provides exposure to international equities, including securities from both emerging and developed markets.
These two ETFs may be a good fit for investors looking to mitigate volatility risk, as each seeks to reduce volatility by 15% over a complete market cycle.
Multifactor ETFs and Mitigating Concentration Risk
While volatility risk is an important concern, investors should not overlook concentration risk in emerging markets.
Concentration risk is just as prevalent in emerging markets as it is in the U.S. Just as the U.S. equity market has reached record levels of concentration, emerging markets benchmarks have seen a similar spike in concentration.
See more: Why It’s Important to Mitigate Concentration Risk
Furthermore, markets tend to normalize after periods of high concentration. During these periods of normalizing concentration, cap-weighted indexes often lag smart beta strategies that use an alternate weighting methodology. This is important for investors to keep in mind as they look to add exposure to emerging markets during a period of high concentration.
Multifactor ETFs like ROAM and RODE mitigate concentration risk by effectively shifting exposure down the cap spectrum. ROAM underweights mega-cap tech and China compared to category peers and the benchmark MSCI Emerging Markets index.
For more news, information, and analysis, visit the Multifactor Channel.
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