Why I Own: VDEM

Jean-Rene Giraud, chief executive of Koris International in France, has been advising his clients on portfolios of ETFs since 2003. In this article, he talks to ETF Report UK about why he uses the Vanguard FTSE Emerging Markets UCITS ETF (VDEM). This article was first published in our quarterly magazine for financial planners, ETF Report UK. To read the full issue and subscribe, click here.

ETF Report UK: When did you start using VDEM?

Giraud: I started advising clients to use it two years ago in portfolios that require some exposure to emerging market equities.

ETF Report UK: How did you choose VDEM?

Giraud: Emerging market indexes are still quite exotic—not in a bad way—in the way they are constructed: They take views on which markets qualify as emerging and that can make a big difference. 

We looked at all the indexes that track broad emerging market stocks, and it came down to MSCI and FTSE. Then we did a deep analysis on those two: The one that came in first in terms of quality, average level of tracking difference and the stable of that tracking difference was FTSE.

But we are not tactical allocators. We really look for broad exposure. We have two indexes in this market and we mix them so there are no specific biases, because a bias adds an additional risk.

Our portfolios are always constructed in the same way: trying to mix exposure to the assets that provide the highest expected returns over the longer term, and returns that are not related to market timing but to the economic fundamentals surrounding the underlying securities.
 

ETF Report UK: Is VDEM liquid?

Giraud: We have always been lucky enough to find inventory at a decent price when both buying and selling the fund—this is not the same in other asset classes like fixed income, as yield is destroyed by the cost of entering the market.
 

ETF Report UK: How do you use VDEM?

Giraud: MSCI and FTSE are not exactly comparable in geographical exposure, and we don't want to take a bias on one country, which is why we mix the two funds.

There were massive outflows from emerging market equities at the start of last year. When that happens in the market, whatever the underlying economics, that's not good for the investor. Our allocation diminished at the time but has started to pick up again. 
 

ETF Report UK: Do you find that VDEM is weighted too heavily in any particular area?

Giraud: We take an agnostic view and don't go into that level of detail. Our portfolio construction means we arbitrage between equities and fixed income, and within fixed income we allocate between Europe, the US and emerging markets. We are not sector or country pickers.

The problem is we don't feel that wide broad indexes for emerging markets are really always relevant, as they have different things in there—Ukraine, Russia, Brazil, India, China. They are not homogenous enough. We are not in a position to pick countries, so we do have to question whether we will keep investing in broad emerging market indexes going forward.

ETF Report UK: What else would you use to replace VDEM?

Giraud: There are more than a dozen funds tracking MSCI and one on the FTSE index. The quality of replication is higher on the FTSE index than MSCI, but as mentioned, we do mix the two.