Softening An Emerging Market ETF Ride

December 13, 2018

Quality

EEMV looks for quality in its pursuit of a lower-volatility portfolio. That means that, relative to IEMG, the fund tilts toward defensive stocks, as noted, as well as regions seeing more sustainable and quality growth.

Specifically, EEMV focuses more on greater Asia—Taiwan, Korea, Thailand—and less on China compared to a total market approach. According to Dhanraj, that reflects BlackRock’s outlook for the region, saying that greater Asia is currently offering higher-quality plays, and should continue to do so in 2019.

Here’s a look at how EEMV and IEMG stack up against each other, and against the broader segment of emerging market ETFs: EEMV is higher quality, smaller size and much, much lower vol.  

 

Source: Style Analytics

 

Value & Growth

EEMV also differs from a total market approach such as IEMG when it comes to value and growth. EEMV goes for quality—not for the cheapest stocks, nor the most growth-y ones. And that’s interesting, because the fund doesn’t offer a lot of access to growth names, but neither it does it tilt toward value. 

The portfolio’s price/earnings ratio is 14.03, according to ETF.com data, notably higher than IEMG’s 11.6 P/E ratio.

“Some of the cheapest stuff in EM, like Turkey and Russia, have in some cases become value traps,” Dhanraj said. “We don’t want value exposures. We want quality in EEMV.”

Here’s how the two portfolios stack up in various measures of value and growth:

 

Source: Style Analytics

 

How To Use EEMV

It wasn’t that long ago that ETF investors only had access to broad-based market-cap-weighted emerging market ETFs such as EEM, IEMG and others, like the Vanguard FTSE Emerging Markets ETF (VWO). These funds have grown into massive portfolios boasting billions of dollars in total assets as core building blocks in portfolios everywhere.

EEMV—and other targeted exposure such as currency-hedged plays—aren’t necessarily replacements for broader ETFs, but often used as complements, according to BlackRock.

Consider that in 2018, when many EM ETFs faced redemptions, both IEMG and EEMV have attracted assets. IEMG took in a net of $14 billion in fresh net assets, while EEMV has gathered almost $400 million in net creations, or 8% total asset growth.

Still, if you are considering replacing core emerging market exposure for a low-volatility approach such as EEMV as volatility picks up, understand what other bets you are making. What you are getting and what you are giving up will directly translate into what your total returns look like.

Contact Cinthia Murphy at [email protected]

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