How To Reduce Exposure To Problem Areas In Emerging Markets ETFs
These days, emerging markets exchange traded funds have a litany of problems, chief among them direct or indirect China exposure and commodities exposure.
For investors, dodging both of those issues can be difficult because even many of the well-known, supposedly diversified emerging markets ETFs feature outsized weights to Chinese stocks. When Chinese stocks are tumbling, it really does not matter if Emerging Markets ETF A has a 27 percent weight to China and Emerging Markets ETF B has a 23 percent China weight. All ETF B is going to be is less bad than ETF A.
“While it is very difficult to ever know ahead of time when equity markets will rebound, we’re seeing more and more careful analysis of emerging markets equity exposures,” said WisdomTree in a recent note.
“China is a major exposure within the MSCI Emerging Markets Index, and it tends to receive a massive amount of attention. Depending on whether people love or hate this equity market, we wanted to help them understand the exposures taken within our ETF lineup.”
Investors looking to get involved with emerging markets from the long side while being underweight China could consider the WisdomTree Emerging Markets Dividend Growth Fund, WisdomTree Trust (NASDAQ: DGRE). As of August 7, DGRE was underweight China by 22.2 percent relative to the MSCI Emerging Markets Index. China is merely the 13th-largest country weight in DGRE with an allocation of 2 percent.
However, that does not mean DGRE is perfect. Commodities-heavy South Africa and Brazil combine for 34.5 percent of DGRE's weight. Still, the ETF has managed modest out-performance of the MSCI Emerging Markets Index over the past month. DGRE's distribution yield is almost 4.2 percent.
Even with that large combined South Africa/Brazil weight, DGRE's commodities exposure is slightly less than that of the MSCI Emerging Markets Index. Investors looking to significantly reduce emerging markets commodities exposure should do so via consumer stocks with the WisdomTree Emerging Markets Consumer Growth Fund, WisdomTree Trust (NASDAQ: EMCG), being an option.
EMCG's commodities exposure is underweight that of the MSCI Emerging Markets Index by 14.7 percent, according to WisdomTree data. The trade-off is EMCG's China weight is slightly above that of the emerging markets benchmark.
“EMCG tracks the performance of an Index that excludes companies within the Energy and Materials sectors,” said WisdomTree.
These days, that is a positive trait. The ETF has a distribution yield of 5 percent.
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