Wherever I May ROAM: An Outperforming Emerging Markets ETF

Much to the chagrin of critics and traditionalists that believe vanilla is the only flavor that should be featured on the menu, exchange traded funds have become increasingly sophisticated (and complex) as the industry has matured.

Yes, sometimes newer ETFs take things too far by focusing 44 different investment factors and making things unnecessarily complex for advisors and investors to understand. But that does not mean all ETFs that don't conform to traditionalists' unwritten rules are bad. In fact, more nuanced strategies can bear fruit with asset classes beyond U.S. equities.

The Lattice Emerging Market Strategy ETF ROAM, which came to market 13 months ago, is one such idea.

Using Downside Risk

The ETF's "index methodology establishes risk-balanced country baskets that reflect each country’s general economic footprint. By using downside risk to determine company weighting, the methodology de-concentrates capital allocation (resulting in lower exposure to developed markets-facing global multi-nationals and state-owned enterprises) and re-allocates risk capital across the wider opportunity set (increased allocation to smaller, more locally driven enterprises)," according to Lattice.

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Indeed, ROAM offers a different approach to emerging markets. For example, its top 10 geographic weights combine for 74 percent of the ETF's weight. Plain vanilla emerging markets ETFs might allocate 35 percent of their geographic weight to the top three countries in their lineups. In ROAM's case, the ETF devotes about as much of its lineup to Thai stocks as it does Chinese shares. Rare is the emerging markets ETF where Polish stocks receive a bigger share of the pie than India, but ROAM does that.

Bigger Isn't Always Better

Quibbling with how ROAM conducts its business is one thing. Quibbling with the results is another matter altogether. While there are "experts" spewing about owning only the largest ETFs, ROAM has offered better than double the year-to-date returns of the Vanguard FTSE Emerging Markets ETF VWO. Since ROAM debuted in February 2015, it's loss is about 360 basis points less than VWO.

ROAM also sports a higher dividend yield and larger allocations to mid- and small-cap stocks than does the MSCI Emerging Markets Index. Translation: ROAM's exposure to state-owned enterprises, the companies that have been contributors to the underperformance of plain vanilla emerging markets ETFs in recent years, is light compared to rival, traditional funds.

Bigger might be better in some instances, but not here.