demand, these under-valued markets can turn out to be a good bet over the long term.
Proposed fund in focus
The proposed passively managed ETF, via a recent SEC filing, will trade under the name of the Market Vectors MSCI Emerging Markets Quality ETF, with broad exposure to emerging markets and a focus on quality growth stocks. The factors determining the quality stocks will be high return on equity, stable earnings growth (yoy) and low financial leverage.
The proposed fund will be done by following the MSCI Emerging Markets Quality Index, a benchmark that focuses on 21 emerging nations, namely Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey (Read: Market Vectors Launches Israel ETF (ISRA)). The fund’s expected correlation with the index is 95% or more, and the benchmark looks to be rebalanced on a semi-annual basis.
How might it fit in a portfolio?
This ETF, if ever approved, could be an interesting option in the global ex-developed market for those who want a diversified portfolio. Although emerging market ETFs have been lagging their developed counterparts this year and have been among the worst performing products, growth rates are still quite high when compared to many of the developed nations.
The latest projection by IMF for emerging markets’ growth is 5% for this year and 5.4% for the next year while the U.S. economy is forecasted to grow 1.7% this year and 2.7% in the next.
Further, risks appear limited thanks to the security selection process i.e. quality growth stocks. Plus, exposure to more than 20 nations is aimed at keeping volatility low, ensuring that the portfolio’s returns are not blown up by a single country.
There are already ample choices in the emerging markets space thereby leading to a fight for AUM. Two of the biggest competitors are likely to be the Vanguard FTSE Emerging Markets ETF (VWO) and iShares MSCI Emerging Markets ETF (EEM). While VWO has over $50 billion in assets and roughly 20 million shares of volume in a day, EEM has amassed around $35 billion in assets and trades 70 million in shares in a day.
Beyond these two ultra-popular funds, there are several other choices based on emerging markets. The iShares Core MSCI Emerging Markets ETF (IEMG), iShares MSCI Emerging Markets Minimum Volatility Index Fund (EEMV), WisdomTree Emerging Markets Equity Income Fund (DEM) and Schwab Emerging Markets Equity ETF (SCHE) are just a few of the many products in the emerging market world.
Given this, the proposed fund will have to sell its quality growth criterion in order to stay competitive in the space. The expense ratio must also be low to attract new investors, as investors certainly are not starved for choice in the emerging market ETF world.
This article is brought to you courtesy of Eric Dutram.