Upon Further Inspection, This Is An Impressive EM ETF

Among the primary drivers of this year's resurgence for emerging markets stocks and the corresponding exchange traded funds are formerly moribund state-owned enterprises (SOEs), particularly those from the energy and materials sectors.

That speaks to the benefits of rising commodities and a weaker U.S. dollar for emerging markets stocks and ETFs. It also underscores how impressive when an emerging markets ETF with no direct commodities exposure outperforms a more traditional benchmark of developing world equities.

That is exactly what the WisdomTree Emerging Markets Consumer Growth Fund EMCG is doing. With no direct exposure to the energy and materials sectors, EMCG is up 19.8 percent year-to-date, an advantage of about 270 basis points over the widely followed MSCI Emerging Markets Index. Underscoring the point that there is more to the recovery in Brazilian stocks this year beyond rebounding commodities prices, Latin America's largest economy is EMCG's largest geographic weight at almost 25 percent.

“The WisdomTree Emerging Markets Consumer Growth Index, by design, excludes Energy and Materials, the two best-performing sectors in the MSCI Emerging Markets Index this year. Yet, through September 22, 2016, what we’ve seen is that this strategy has managed to outperform the benchmark by 3.84%,” said WisdomTree in a recent note.

On top of excluding energy and materials names, EMCG is underweight what have been the four best-performing emerging markets sectors this year – energy, financial services, materials and technology. In fact, technology and financial services names combine for just over 23 percent of the ETF's weight while those sectors combine for almost half of the MSCI Emerging Markets Index.

“That the WT Emerging Markets Consumer Growth strategy was able to outperform the MSCI Index despite significant under-weights in the top-performing sectors seems counterintuitive. The bottom line: The individual stocks in the strategy, and the way in which they are weighted, were the driving force behind its outperformance. More specifically, it was also the country and currency exposure in the strategy, particularly within the strategy’s Brazilian holdings,” adds WisdomTree.

After the 25 percent allocation to Brazil, EMCG devotes nearly 36 percent of its combined weight to Chinese and South Korean stocks. EMCG debuted three years ago, so it has been through some rough patches for emerging markets stocks, but over that period, the WisdomTree ETF has performed just half as poorly as the MSCI Emerging Markets Index.