Inside A Multifactor Emerging Market ETF

February 11, 2019

These stats go to show that portfolio differences can have more or less of an impact on portfolio performance depending on the size of the allocation relative to the overall mix.


IEMG Portfolio

EMGF Portfolio

Source: data  


Factor Impact

Beyond country and sector tilts, EMGF is a multifactor ETF. A closer look at the factor bets in this fund also help explain what’s driving the divergence in returns relative to IEMG and the MSCI benchmark.

In 2018, investors largely shunned emerging markets, but those who accessed the region seemed to look for safer bets in what’s considered a riskier equity universe. From a factor perspective, according to Style Analytics data, in 2018, investors liked quality and low-volatility stocks. They also preferred higher-yielding and large-cap names.

In the case of EMGF specifically, its focus on quality was helpful to portfolio performance, but the fund’s tilt toward higher-volatility names—measured on an absolute daily basis—as well as its tilt toward smaller size relative to the benchmark, weighed on its performance last year.

“Even though EMGF doesn't necessarily call out ‘volatility’ in its model description, it’s a byproduct of their model, and that didn't help in 2018,” said Tom Idzal, managing director at Style Analytics. “Ironically, the model did a pretty good job of selecting better high-vol names, but the overall category took a beating.”

“This is a pretty good example of why I repeatedly say, ‘What else does an ETF bring you beyond the headline theme or strategy’?” he added. “It’s very hard for anyone to have predicted that higher vol would be problematic in EM during 2018, but sometimes exposures sneak up and take a bite.”

No One-Size-Fits-All Solution

IEMG has $59 billion in total assets, costs 0.14% in expense ratio and trades $1.2 billion on average a day, with an average spread of 0.02%. By comparison, EMGF has almost $300 million in total assets, costs three times as much, at an expense ratio of 0.45%, and trades $4.25 million on average a day, with an average spread 10 times as wide, at 0.22%.

There’s no question who’s the biggest, most popular, most heavily traded and cheapest ETF of the two.But that doesn’t mean IEMG is always the best one.

There’s no such thing as a one-size-fits-all emerging market ETF, and choices abound in a segment currently populated by 226 different ETFs. Different tilts and bets you make with different portfolios mean different return streams over time. Due diligence is key.

Contact Cinthia Murphy at [email protected]

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