A Pleasant Surprise Among New ETFs

As was the case in previous years, hundreds of new exchange traded funds debuted in 2018. A common theme among new ETFs, regardless of the year in which they launch, is that it often takes a while for investors to devote assets to them.

Finding winners among new ETFs from an asset-gathering standpoint is usually easy, but the reasons for that success often varies among infant ETFs.

What Happened

The John Hancock Multifactor Emerging Markets ETF JHEM is among the more surprising ETFs to come to market this year. JHEM, which debuted in late September, had nearly $283 million in assets under management as of Wednesday, Dec. 26.

Among ETFs that came to market this year, only eight other funds have attracted more assets than the smart beta emerging markets fund issued by Boston-based John Hancock.

Why It's Important

JHEM's immediate success in asset-gathering terms is impressive and important when considering the well-documented struggles of emerging markets equities this year. The MSCI Emerging Markets Index is down 17.51 percent year-to-date. That index is cap-weighted, while JHEM is a multifactor fund, focusing on investment factors such as smaller cap, lower relative price and higher profitability.

As JHEM ages, it would be reasonable to expect its returns will vary from those of cap-weighted emerging markets benchmarks, but the fund's net asset value is lower by 8 percent since its inception as of Dec. 26. 

In terms of sheer size, JHEM is benefiting from an influx of in-house assets, a theme that is becoming increasingly prevalent among fund issuers bringing new ETFs to market. Several of this year's new ETFs ahead of JHEM as measured by assets have been populated by assets from their respective issuers.

What's Next

JHEM allocates just over a quarter of its weight to Chinese stocks, meaning the new ETF is underweight the world's second-largest economy relative to the MSCI Emerging Markets Index. South Korea and Taiwan combine for over 27 percent of the Hancock fund's geographic exposure.

JHEM's methodology includes screening for low momentum names so those stocks are excluded. Additionally, JHEM avoids making changes to its roster that do not have the potential to materially affect the fund's risk-reward profile.

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