During a recent ETF Trends webcast focused on emerging markets, 42% of advisor respondents said that they allocate between 5% and 10% of client assets to emerging markets, and an additional 11% reported taking an even more aggressive approach. However, the majority were using broad emerging market ETFs to gain exposure. Given the performance challenges for such equity ETFs, we expect advisors to look for alternatives.
As of April 21, the three largest emerging markets equity ETFs – the Vanguard FTSE Emerging Markets ETF (VWO ), the iShares Core MSCI Emerging Markets ETF (IEMG ), and the iShares MSCI Emerging Markets ETF (EEM ) — were down between 11% and 13% to start the year. These broad funds were partially dragged down by hefty exposure to China. While volatility is to be expected with emerging markets, advisors can either complement exposure to EEM, IEMG, or VWO, or potentially replace these funds with something different. Let’s review some of this year’s better-performing alternatives and how they are positioned. (This list is not exhaustive.)
The Invesco S&P Emerging Markets Low Volatility ETF (EELV ) rose 3.6%, significantly outperforming broad market ETF peers. The ETF is built from the bottom up by focusing on the least-volatile stocks in the emerging markets universe — that seems to be an oxymoron, but it is true — and is rebalanced quarterly. EELV is heavily exposed to financials (40% of assets) and has more exposure to Taiwan (25%), Thailand (11%), and Saudi Arabia (11%) than China (9%).
The WisdomTree Emerging Markets High Dividend Fund (DEM ) and the WisdomTree Emerging Markets SmallCap Dividend Fund (DGS ) are relatively strong performers, having declined only 1.5% and 1.6%, respectively. Dividend-paying companies, particularly in emerging markets, also tend to provide more stability during market uncertainty as the income component offers appeal.
While multi-cap-focused DEM had slightly less exposure to China than IEMG (23% vs. 26%), its small-cap sibling DGS had only 11%, with hefty stakes toward Taiwan and South Korea. DEM benefitted in part from allocating 21% of assets in Brazilian stocks such as Petroleo Brasileiro and Vale.
The Freedom 100 Emerging Markets ETF (FRDM) invests in large-cap companies based in countries with high human and economic free scores, which includes Chile (21%), Taiwan (18%), South Korea (16%), and Poland (11%), but not China. This approach has performed relatively well in 2022, with FRDM down just 3.6% year-to-date through April 20.
Lastly, the JPMorgan Diversified Return Emerging Markets ETF (JPEM ) fell 4.4% to start 2022. JPEM owns shares of emerging market companies with low value, high quality, and strong momentum attributes, but the fund also is broad benchmark-aware at the regional level. Companies based in China (23%), Taiwan (11%), Brazil (11%), and India (11%) are most represented.
Despite the losses for some products, advisors believe it is important to have emerging market equity exposure as part of a well-diversified portfolio. There are lots of choices to consider, but it is important to understand how and why these funds are positioned the way they are before investing.
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