Not All Emerging Markets Stocks Are Duds — This ETF Proves As Much

Although it's been perking up recently, the MSCI Emerging Markets Index is again lagging domestic stocks as the emerging markets benchmark is lower by 4.28% year to date, a showing that's more than 200 basis points worse than the S&P 500.

What Happened? Not all emerging markets stocks and exchange-traded funds are disappointing investors. The KraneShares FTSE Emerging Markets Consumer Technology Index ETF KEMQ, which is higher by 15.71% year to date, is proof positive of that assertion.

KEMQ tracks the Solactive Emerging Markets Consumer Technology Index, which is comprised of “internet retail, internet software/services, purchase, payment processing, or software for internet and E-Commerce transactions” purveyors, according to KraneShares.

Why It's Important: A simple, but true assessment of KEMQ is that the fund puts investors exactly where they ought to be with developing economies – at the corner of consumer cyclical, communication services and technology growth.

“We have previously noted that broad EM has actually been dragged down by heavy weightings to “slow growth” sectors such as energy, financials, and materials,” said KraneShares in a recent note. “We would all agree that for the last decade growth stocks have outperformed value stocks handily in the United States and globally. We believe the same trend is materializing in Emerging Markets and that re-balancing accordingly may provide performance benefits.”

While many investors appreciate the diversification advantages offered by benchmarks such as the MSCI Emerging Markets Index, historical data confirm that embracing the concentration of emerging markets consumer discretionary and technology names is a strategy that has handily outperformed broader indexes for more than a decade.

What's Next? Not surprisingly, sector allocation explains much of the performance chasm between KEMQ and broader rivals.

“Year-to-date, sector allocation has accounted for most of the divergence between KEMQ and broad EM indexes,” according to KraneShares. “2-factor attribution analysis is often used by portfolio managers to determine the underlying cause of the underperformance or outperformance of one portfolio compared to another. 2-factor attribution tells us whether sector selection or stock selection has had the greatest impact on portfolio performance over a period of time.”

With investors starting to nibble at developing economies, some may want to consider the advantages of concentration offered by KEMQ.

“As investors are beginning to reconsider EM investments, it may not make sense to continue taking the same approach that has been a pain point for so long. Instead, we believe investors may wish to consider a larger allocation to emerging market growth sectors,” said KraneShares.