After a string of issues including turmoil in oil prices , China weakness and global growth slowdown dragging the emerging markets down, a positive shift in sentiment can be seen lately. Stabilizing commodity prices and continued economic transition in China could lead to significant upside in the long run.
This trend is validated by the two most popular ETFs - iShares MSCI Emerging Markets ETFEEM and Vanguard FTSE Emerging Markets ETFVWO - climbing over 2.8% and 3.2%, respectively, in the past one month. In comparison, iShares MSCI ACWI ETFACWI gained 0.6% and SPDR S&P 500SPY rose 1.7%, suggesting that the emerging segment is headed for a rebound (read: Can Emerging Market ETFs Sustain the Rally? ).
This trend has not gone unnoticed by First Trust Advisors L.P., which has launched an actively managed fund with a focus on the emerging market space. The fund is an attractive option for investors seeking to diversify their portfolio through exposure to the emerging market.
RFEM in Focus
The fund launched on June14, 2016 trades on Nasdaq. RFEM is actively managed by the sub-advisor RiverFront Investment Group, LLC. The fund selects stocks based on RiverFront's proprietary methodology, which involves a quantitative and qualitative ranking system based on factors like value, quality and momentum. This is combined with an optimization process and detailed analysis. The fund also employs dynamic currency hedging and risk management.
The product seeks to provide capital appreciation through exposure to emerging market companies. The fund has a basket of 291 stocks with the top 2 stocks holding an aggregate weight of just over 17%, while other stocks do not hold more than 4% weight individually.
The fund has a somewhat high expense ratio of 0.95%. From a country perspective, South Korea takes the top spot with about 23.3% of the basket followed by Taiwan (17.9%), China (13.6%), Brazil (10.1%) and India (9%). From a sector point of view, the fund has high exposure to Information Technology and Financials, comprising approximately 50% of the fund's assets. Consumer Discretionary also has double-digit allocation.
How does it fit in a portfolio?
For investors looking to diversify their portfolio and believing in the emerging market rebound, this fund can be a good choice to invest in. Emerging markets are dynamic in nature, and thus an actively managed ETF would be better positioned to capitalize on the change in sentiment and fundamentals (read: Emerging Market ETFs -Value Play or Value Trap? ).
Moreover, the fund is well diversified as far as individual stocks and country weights are concerned. Expenses are however a bit high.
Though the emerging market space is crowded with products, the newly launched ETF should not face many obstacles in amassing assets thanks to its unique stock selection technique, which could set the new entrant apart from the entire lot.
Having said this, products like iShares MSCI Emerging Markets Minimum Volatility Index FundEEMV , PowerShares S&P Emerging Markets Low Volatility PortfolioEELV , FTSE RAFI Emerging Markets PortfolioPXH and PowerShares DWA Emerging Markets Technical Leaders PortfolioPIE might give the newcomer a run for its money. These ETFs operate in the emerging market space with some tweaks.
Apart from these, the emerging market equities space is primarily dominated by two large players - VWO and EEM - with funds under management an impressive $35.6 billion and $21.8 billion, respectively. While VWO's expense ratio of 0.15% is far less than RFEM, EEM charges a fee of 70 basis points (read: Emerging Markets Back On Track: 5 Outperforming ETFs ).
Despite the competition, the newly launched fund has the potential to emerge as a winner if it manages to generate returns net of fees greater than other products in the emerging market ETF space.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.