With EM ETFs, Sometimes it is Who You Know
The proverbial "they" often say "It is not what you know, it is who you know." That phrase has plenty of meaning in everyday life, but, believe it or not, it can also be applied to the world of exchange traded funds. Specifically, the saying can be applied directly to select diversified emerging markets ETFs.
As has been noted, some popular diversified emerging markets ETFs have been plagued this year by large weights to countries such as Brazil, China and South Korea. On Wednesday, Benzinga reported that the country-specific ETFs tracking the top seven nation weights in the iShares MSCI Emerging Markets Index Fund (NYSE: EEM) are all down year-to-date.
Conversely, five of the seven country ETFs tracking the next seven country allocations within are up year-to-date. Averaged together, that group of seven offers a positive year-to-date return.
Investors looking to capture the best of the emerging world do not need to own five or six ETFs because one ETF that proves it is who you know when it comes to country weights is standing tall in 2013. That fund is the PowerShares DWA Emerging Markets Technical Leaders Portfolio (NYSE: PIE).
The $438.5 million PIE is up about 7.3 percent year-to-date and that is even with a combined 21.6 percent allocation to South Africa and South Korea, two of the markets that are plaguing EEM and comparable ETFs this year.
Actually, South Africa and South Korea are PIE's fourth- and fifth-largest country exposures with weights of 11.35 and 9.29 percent, respectively as of March 27, according to PowerShares data.
PIE has been able to fight off the woes of those markets by "knowing" some of this year's top developing world investment options. Translation: Indonesia, Thailand and Mexico combine for about 43 percent of PIE's weight. Alone, Indonesia is just less than 16 percent of PIE's weight. Said differently, Southeast Asia's largest economy has more than five times the weight in PIE that it does in EEM.
That allocation and others make a difference. The returns prove as much. Year-to-date, the average return for the iShares ETFs tracking Indonesia, Thailand and Mexico is 10.8 percent. On the other hand, EEM's top three country weights – China, South Korea and Brazil – are all in the red this year as measured by the relevant corresponding ETFs.
Clearly, PIE's "secret sauce," though it is no secret, is using relative strength as a method of finding the best emerging world opportunities. Good news for PIE investors, but maybe not so much for Brazil and China bulls. Those two nations combine for just 6.7 percent of PIE's weight. India and Russia are not even included in PIE's lineup at the moment.
Add Turkey and the Philippines into the mix, and PIE looks all the more impressive. Those two countries combine for 13.7 percent of the ETF's weight. Add those to the aforementioned trio of Indonesia, Thailand and Mexico and that is nearly 57 percent of PIE's weight.
At the individual ETF by adding Turkey and the Philippines to the Indonesia, Thailand and Mexico mix, the average year-to-date return for those five iShares ETFs jumps to 11.1 percent (not including Thursday's performances).
PIE offers up another advantage. It is less volatile than some of the larger, diversified emerging markets ETFs. PIE's year-to-date volatility is just 11 percent compared 12 percent for EEM. Then there is the fact that the Dorsey Wright Emerging Markets Technical Leaders Index has outpaced the MSCI Emerging Markets Index and the MSIC Emerging Markets Growth Index over the past five years, according to PowerShares data.
No cute pie analogies are needed. Investors that cannot allocate capital to all of the country-specific ETFs tracking Indonesia, Thailand and friends should use PIE to profit from what are clearly 2013's emerging markets leaders.
For more on emerging markets ETFs, click here.
© 2014 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.