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Quality Works For This Emerging Markets ETF

May 9, 2016 3:39 pm
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Quality Works For This Emerging Markets ETF

The marriage of the widely followed quality and emerging markets equities is working this year. The overlooked though it probably should not be SPDR MSCI Emerging Markets Quality Mix ETF (SPDR Index Shares Fund (NYSE: QEMM)) is starting to prove as much.

One of the disadvantages of embracing the quality factor is that the factor's ability to help investors locate consistency and lower volatility can mean investors are vulnerable to leaving some upside on the table in overt bull markets. By the recent, forgettable standards set by emerging markets stocks and exchange traded funds, the asset class is in a pretty obvious bull market.

Quality Works For QEMM

So, it probably is not surprising to see QEMM slightly lagging the MSCI Emerging Markets Index over the past 90 days, but QEMM is still up a tidy 9.9 percent over that period. Plus, the ETF is fresh of an endorsement from a professional money manager interviewed by Barron's.

Related Link: Make The Quality Call With This ETF

QEMM, which turns two next month, follows the MSCI Emerging Markets (EM) Quality Mix Index. The quality factor “captures excess returns to stocks that are characterized by low debt, stable earnings growth and other ‘quality’ metrics,” according to MSCI.

Sector Allocations

Like many diversified emerging markets ETFs, QEMM's largest sector allocation is financial services. QEMM devotes nearly 24 percent to that sector. However, the ETF's exposure to often volatile state-controlled companies is tolerable after financials. For example, QEMM's combined weight to the energy and utilities sectors, which in the emerging markets space are littered with state-controlled firms, is just 12 percent.

Additionally, QEMM is levered to some important emerging markets themes, namely technology and the consumer. Those sectors combine for a third of the ETF's weight. Underscoring QEMM's technology and consumer exposure is the fact that Alibaba Group Holding Ltd (NYSE: BABA) commands a larger weight in the ETF than does any Chinese bank.

Country Weights

Speaking of China, that is QEMM's largest country weight at 22.5 percent. As a quality ETF, QEMM should, at least in theory, be less volatile than traditional emerging markets ETFs. QEMM makes an effort on that front be allocating a combined 27.3 percent of its weight to South Korea and Taiwan, two of the least volatile emerging markets.

Conversely, Brazil and Russia, two of the highest standard deviation emerging markets, combine for less than 10 percent of QEMM's weight. QEMM charges 0.3 percent per year, or $30 for every $10,000 invested.

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