Structure Matters: Inside The GDP 'Factor'

June 17, 2015

his column is part of a new collection of our “Structure Matters” series of interviews with leading ETF and index industry figures. They are conducted by Dan Weiskopf, a portfolio manager at New York-based Access ETF Solutions LLC. In today’s piece, Weiskopf interviews Brendan Ahern, chief investment officer of KraneShares, the ETF sponsor focused exclusively on China.


Dan Weiskopf: KraneShares is primarily known for its China focus. What primary factors have led to the underperformance of the emerging markets over the U.S. markets since 2008? Has China been the driving issue?

Brendan Ahern: We recognized the onshore equities represented by the world’s fourth- and seventh-largest stock exchanges—the Shanghai and Shenzhen Stock exchanges—were excluded from broad emerging market (EM) indices. We believe a complete China allocation should go beyond Chinese companies listed in Hong Kong and include the onshore equities.


Since the end of the financial crisis, EM equities have not kept pace with U.S. equities. We identified three factors we believe negatively affected EM performance and could continue to do so. Working with FTSE, we found that a GDP-weighted EM country allocation reduces exposure to these factors versus traditional market-cap-weighted allocations. This led to the development of the KraneShares FTSE Emerging Market Plus ETF (KEMP).


Weiskopf: Let’s start with the factors you believe investors should be focused on.

Ahern: The first factor is U.S. dollar strength and the potential Federal Reserve rate hike.


Since its five-year low on July 26, 2011 through April 30, 2015, the Bloomberg Dollar Spot Index returned 28.95 percent. While the dollar has strengthened, some individual EM currencies have depreciated significantly as illustrated by the second chart below.


This foreign exchange exposure hurt market-cap-weighted EM indices due to their overweight to several of the worst-performing currencies. The specter of a potential rate hike from the Federal Reserve could exacerbate this situation, because when rates rise in the U.S., the dollar typically strengthens.





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