GEM Specialized Strategy ETFs: Some Attractive Alternatives

by: Thomas Furda

There are several global emerging market (NYSEARCA:GEM) ETFs which utilize specialized index strategies. These include low-volatility, fundamental and technical strategies. As we will see below, investors can benefit by utilizing these alternative strategies, but it's important to understand fund composition since these funds differ considerably. There are four funds to consider in this group.

GEM Strategy ETFs

(Click to enlarge)

Four unique strategies

iShares MSCI Minimum Volatility (NYSEARCA:EEMV) has seen its assets grow significantly since its launch in late 2011. The fund follows the MSCI EM Minimum Volatility Index which basically selects companies based on a volatility and risk methodology. The fund is diversified, with over 200 holdings and the top 10 holdings represent only 14% of the total portfolio. Country exposure is more in Asian markets with over-weights in Taiwan, Malaysia, Thailand and Indonesia relative to the benchmark GEM ETFs. The fund also has relatively low exposure to commodity sectors like energy and materials. EEMV has the lowest expense fee of the group at 0.25%.

Powershares Emerging Markets Technical Leaders (NASDAQ:PIE) follows the Dorsey Wright index which is essentially a momentum-based index, favoring markets demonstrating solid relative strength characteristics. Its portfolio is heavily weighted to Southeast Asian markets like Indonesia and Thailand as well as South Africa and Mexico. One immediate characteristic investors can glean from the country composition of the portfolio is that it backs countries that have young populations. Sector composition also favors consumer companies and industrials. There is little exposure to 'value' sectors like energy and telecoms. The fund has around 100 holdings with a fairly low concentration of holdings. It is the most expensive fund of the category, though, charging a 0.9% expense fee.

Powershares FTSE RAFI Emerging Markets (NYSEARCA:PXH) follows an index which selects securities based on a 'fundamental' methodology. These are measures of book value, sales, dividends and cash flow. Essentially what investors get are companies that are relatively cheap on traditional valuation metrics and almost exclusively large cap. This makes its portfolio somewhat similar to cap weighted benchmark funds like Vanguard FSTE Emerging Market (NYSEARCA:VWO) which also excludes South Korea from its portfolio. PXH has higher weights in sectors like energy and IT and its largest country exposure is Taiwan. The fund does offer a decent trailing dividend yield of over 5%.

Finally EG Shares Low Volatility Emerging Markets Dividend (NYSEARCA:HILO) is designed to offer income and low volatility. Its sector exposure is broad but country exposure is more concentrated with over-weights in South Africa and Turkey. Many companies in these countries typically offer high nominal dividend yields but have faced currency volatility in the past. The fund has little exposure to Brazil and Russia and is concentrated with only 30 holdings. The fund also offers a similar trailing yield to PXH.

EEMV is the most liquid fund of the group trading around $50m/day. PIE is also quite liquid trading around $5m/day, while PXH and HILO trade around $1.4m/day and $0.75m/day respectively.

And EEMV and PIE are the best performers

A look at 12 month returns shows EEMV and PIE outperforming benchmark iShares MSCI Emerging Markets (NYSEARCA:EEM) by over 10% while PXH has lagged the benchmark along with HILO.

(Click to enlarge)

EEMV and PIE are likely to remain positive standouts

EEMV and PIE are compelling considerations for emerging market investors. EEMV's volatility and risk screen has proven its ability to pick winning securities (or avoid bad ones) in a short amount of time. A scan through the fund's holdings shows limited exposure to state-owned enterprises (SOEs) and a general weight towards Asian markets. The fund has almost no exposure to Russia and exposure to other BRIC countries is well below benchmark. I see these as positive attributes. PIE offers a compelling portfolio aimed at markets that are attractive from a demographic standpoint which is a key reason to invest in emerging markets. It is a bit more expensive than most emerging market ETFs, however, index selection is a more critical factor.

The only reason to consider PXH is as a contrarian value investment or if you have a bias towards large cap companies. The fund is cyclically-driven and exposed to SOEs. Barring a sharp global growth pick-up I would avoid it. HILO is concentrated for a low-volatility strategy and the least liquid of the funds. For investors seeking yield this fund is more attractive than PXH in this category.

Disclosure: I am long EEMV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.