A Smart Beta Spin On Emerging Markets

Smart beta is one of the fast-growing parts of the exchange-traded funds space and as the idea of weighting by factors and fundamentals has gained traction, more and more emerging markets ETFs have appeared that eschew traditional cap-weighted methodology.

Emerging Markets ETFs

That group includes the unheralded iShares Edge MSCI Multifactor Emerging Markets ETF EMGF. The iShares Edge MSCI Multifactor Emerging Markets ETF, which debuted in December 2015, tracks the MSCI Emerging Market Diversified Multiple-Factor Index. Among EMGF's objectives are to provide investors with exposure to “inexpensive stocks, financially healthy firms, trending stocks and relatively low market cap companies,” according to iShares.

EMGF is just 15 months old, but its still nascent track record is impressive. The smart beta emerging markets ETF hit an all-time high Thursday and since coming to market, EMGF is up 21.1 percent, an advantage of about 180 basis points over the cap-weighted MSCI Emerging Markets Index.

That performance differential indicates there are some differences between EMGF and the widely followed MSCI Emerging Markets Index.

That is evident at the country level where China, South Korea and Taiwan combine for 52 percent of the MSCI Emerging Markets Index. The top three country weights in EMGF are China, South Korea and Brazil with that trio representing over 57 percent of the ETF's weight.

EMGF is also slightly underweight India but modestly overweight Russia relative to the MSCI Emerging Markets Index. The smart beta ETF's Russia exposure is significantly higher than the emerging markets benchmark as well.

Sector Weights And Holdings

The MSCI Emerging Markets Index devotes about 60 percent of its weight to financial services, technology and consumer discretionary stocks. Those are EMGF's top three sector allocations as well, but that trio is about 56 percent of that fund's weight.

Another obvious difference is that EMGF holds just under 170 stocks, well below the almost 850 found in the MSCI Emerging Markets Index.

EMGF charges 0.45 percent annually, or $45 on a $10,000 investment. That is low when measured against other smart beta strategies but pricey compared to many cap-weighted emerging markets ETFs.