Relative performance and asset flows in recent months show we might be entering a new period of emerging market outperformance. It makes sense. EM equities are dirt-cheap compared with the U.S. stock market in terms of valuations, which shouldn't be a surprise given the multiyear relative performance bear market for EM.
If investors want to wade back in to EM, but are still nervous given its notorious volatility and underperformance over the last five years, which ETFs should they turn to? There is a wide array of emerging market ETF options these days, and many are, quite frankly, pretty cool portfolios.
It's a big asset class, comprising many segments and strategies, and there's an ETF for nearly every possible exposure. One way to attain fresh exposure, especially if one is tentative, is to select an ETF with a lower risk profile, at least relative to its EM brethren.
Common Threads In Low Volatility
Among the emerging market ETFs with the least volatility, there are some common threads. They are either dividend-oriented, low-volatility, high-quality, currency-hedged, frontier EM or some combination thereof. At CLS, we are increasingly emphasizing factor investing and smart-beta ETFs, so we would look to those ETFs emphasizing factors that have historically provided long-term excess returns.
That would eliminate the currency-hedged EM ETFs (currency hedging is always good for a debate, and discussions at CLS meetings are no exception), and frontier markets (which we believe is a great asset class of its own).
Next, we would eliminate some of the smaller ETFs in terms of assets under management. (This does currently knock out some very interesting ETFs from solid ETF providers, such as EG Shares and PowerShares.)
Four Funds To Consider
This brings us down to four intriguing ETFs:
- FlexShares Morningstar Emerging Markets Factor Tilt (TLTE | C-91) is a solid option for investors who want a lower-risk, multifactor EM ETF. This ETF seeks to enhance exposure to developing market stocks by tilting the portfolio toward the long-term growth potential of small-cap and value segments.
- iShares MSCI Emerging Markets Minimum Volatility (EEMV | B-71) also emphasizes an investment factor, but in this case, it is minimum volatility, not value and market cap. EEMV seeks to track the investment results of an index composed of emerging market equities, which, in the aggregate, have lower-volatility characteristics relative to the broader emerging equity markets.
- SPDR S&P Emerging Markets Dividend (EDIV | C-49) emphasizes the dividend factor. It tracks the S&P Emerging Markets Dividend Opportunities Index, which generally includes 100 tradable, exchange-listed common stocks from emerging market countries that offer high-dividend yields. In addition to some liquidity factors, stocks must have positive three-year earnings growth and profitability.
- WisdomTree Emerging Markets High Dividend (DEM | B-81) is another dividend-oriented ETF. It tracks an index that measures performance of the highest-dividend-yielding stocks selected from the WisdomTree Emerging Markets Dividend Index. At the index measurement date, companies within the index are ranked by dividend yield. Securities ranking in the highest 30% are selected for inclusion, and companies are weighted based on annual cash dividends paid.