PowerShares FTSE RAFI Emerging Markets ETF: Best of Breed

When it comes to funds tracking the same corner of the market (i.e. domestic large-cap growth), it's not uncommon for different indices to hold essentially the same companies -- making expenses the biggest differentiator. However, it would be a big mistake to assume that is the case with today's featured fund -- which focuses on the fast-growing emerging markets. While there might be a number of different funds with "Emerging Markets" somewhere in the title, this is not a "one-size fits all" group.

PowerShares BLDRS Emerging Markets 50 (Nasdaq: ADRE), for example, only holds a portfolio of 50 stocks; all large, highly liquid foreign ADRs. By comparison, Vanguard Emerging Markets (NYSE: VWO) has a sprawling portfolio of nearly 1,000 names, many of them in the small/mid-cap range. And WisdomTree Emerging Markets High Yield (NYSE: DEM) falls somewhere in between, but only devotes a microscopic 3% of assets to China, arguably the most explosive of all emerging markets.

All things considered, PowerShares FTSE RAFI Emerging Markets (AMEX: PXH) looks to be one of the best in the field. Like other funds in its family, PXH looks past market capitalization and selects companies based on fundamental measures like cash flow, sales, and dividends. The portfolio contains roughly 160 companies, split almost equally between growth and value. At nearly 20% of assets, China represents the heaviest weighting, followed by South Korea, Brazil, Taiwan and Russia.

Shareholders will be betting on the continued prosperity of companies like Gazprom, the world's largest natural gas producer, and POSCO (NYSE: PKX), a well-positioned South Korean steelmaker that has already made a bundle for Warren Buffett.

Over the past five years, the FTSE RAFI EM Index, PXH's benchmark, has posted sizzling annualized gains of +41.9% -- about 1,400 basis points per year ahead of the more popular MSCI Emerging Markets Index. And since the beginning of 2000, the fund would have turned a $10,000 investment into more than $60,000, double its benchmark and quadruple the gain of the developed markets in the MSCI EAFE.

Of course, that backtested data should only be lightly considered, but it's impressive nonetheless. More importantly, the underlying portfolio components are still far from stretched in terms of valuation -- with an attractive portfolio P/E of just 12.4.

Many emerging markets are now entering their sixth year of a prolonged bull market, so investors accustomed to seeing red-hot annual gains of +40%, +50%, or more should tone down their expectations. That being said, these markets are also tied to some of the fastest-growing economies on the planet and should continue to put up above-average returns, making the occasional downturn a good window to climb in.

And we certainly saw that over the past six months, as PXH slipped more than -20% off its highs before bouncing back recently. I think this fund fits the bill for an investor looking to capitalize on the continued growth of the world's emerging markets, and any pullback may well be a buying opportunity.

Disclosure: none