ETF Offers New Take On EM

Today, newcomer Dawn Global rolled out a different kind of emerging market ETF. The Asian Growth Cubs ETF (CUBS) is actively managed and eschews the typical coverage one expects to find in an emerging market fund covering Asia in order to target the high-growth markets of Bangladesh, Indonesia, Pakistan, the Philippines and Vietnam. China and India are among the emerging markets not included in the portfolio.

The fund comes with an expense ratio of 0.99% and lists on the NYSE Arca.

Investment Argument

The press release notes that the five target markets are both fast growing and “historically difficult to access,” with a combined population of more than 860 million people.

Maurits Pot, one of CUBS’ portfolio managers, says that the roughly $600 billion universe of existing emerging market ETFs tends to focus on six markets (the four BRIC countries as well as Taiwan and South Korea), with mainly cap-weighted exposure.

“To get exposure to the next generation of emerging markets, which are growing faster, are younger, are more dynamic … is actually very hard,” said Pot. He notes that the management team for CUBS looks beyond the major indexes to focus on a group of Asian markets with similar characteristics such as large, youthful and educated populations.

Pot further points out that CUBS provides access to markets where ADR and ETF coverage is limited, and direct access to the securities can be expensive.

Methodology

He also rejects market cap weighting as a valid approach, asserting that it results in a lower growth trajectory over the longer term.

“We take a forward-looking lens to the economy. We look at the next generation beyond the index, and we’re looking at that through an active lens,” Pot said. The firm uses a top-down and bottom-up approach, and equal-weights its portfolio holdings, he adds.

CUBS has an ESG element in that it excludes companies with too much involvement in the defense, fossil fuels, gambling, mining and tobacco industries. Beyond the usual size and liquidity requirements, the fund’s methodology also incorporates a quality screen, and takes into account a company’s exposure to leverage, the prospectus says.

From there, the managers conduct three reviews of the remaining pool of companies: a bottom-up business review, a valuation review and a management review. The reviews are followed by a risk assessment to determine the final portfolio, with the intention of screening out companies that could be involved in financial fraud or subject to a takeover, according to the document. It further notes that the portfolio can hold up to 80 securities.

The largest emerging market ETF is the nearly $85 billion Vanguard FTSE Emerging Markets ETF (VWO). The fund’s biggest allocations are to Hong Kong, Taiwan and India, none of which is represented in CUBS.

Contact Heather Bell at [email protected]