After a string of issues including turmoil in China and global growth slowdown dragging the emerging markets down, a positive shift in sentiment can be seen lately. This trend is validated by the two most popular ETFs – iShares MSCI Emerging Markets ETF (EEM) and Vanguard FTSE Emerging Markets ETF (VWO) – climbing over 11% in the past one month. In comparison, iShares MSCI ACWI ETF (ACWI) gained 5.6% and SPDR S&P 500 (SPY) rose 4.7%, suggesting that the emerging segment is headed for a rebound (read: Can Emerging Market ETFs Sustain the Rally?).
This did not go unnoticed by Victory Capital, which has launched a smart beta fund with a focus on the emerging market space. The 11th fund by the company is a low-risk alternative for investors seeking to diversify their portfolios through exposure to the emerging market.
Below, we have highlighted the newly launched fund – Victory CEMP Emerging Market Volatility Weighted Index ETF (CEZ) – in greater detail.
CEZ in Focus
The fund launched late last week trades on Nasdaq. The product seeks to track the performance of CEMP Emerging Market 500 Volatility Weighted Index. The index comprises 500 stocks domiciled in the emerging market nations with a history of positive earnings. The weightage is based on their volatility measured by daily standard deviation over the last 180 trading days compared to the aggregate mean.
The fund has an expense ratio of 0.50% and will be rebalanced on a semi-annual basis. The fund currently has 499 stocks in its basket with the top 10 stocks holding an aggregate weight of just over 5%, indicating low concentration risk. From a country perspective, Taiwan takes the top spot with about 11.9% of the basket followed by China (11.5%), Korea (9.7%), India (9.5%) and Malaysia (8.7%). Currently, the fund provides exposure to 22 countries in total.
As per ETF.com, the fund has already amassed $2.5 million in its asset base (see all Broad Emerging Market ETFs here).
How does it fit in a portfolio?
For investors looking to diversify their portfolio and having faith in the emerging market rebound, this fund can be a good choice to invest in. Thanks to its strategic beta approach that combines fundamental measures along with inverse volatility weighting of individual stocks, it can lead to a broader diversification than traditional market cap weighting. Thus, it also possesses the potential to outperform traditional indexing strategies (read: Emerging Markets Back On Track: 5 Outperforming ETFs).
Moreover, the fund is well diversified as far as individual stocks and country weights are concerned, while expenses are reasonable.
ETF Competition
Though the emerging market space is crowded with products, the newly launched ETF should not face many obstacles in amassing assets thanks to its unique stock selection technique, which could set the new entrant apart from the entire lot.
Having said this, products like iShares MSCI Emerging Markets Minimum Volatility Index Fund (EEMV), PowerShares S&P Emerging Markets Low Volatility Portfolio (EELV), FTSE RAFI Emerging Markets Portfolio (PXH) and PowerShares DWA Emerging Markets Technical Leaders Portfolio (PIE) might give the newcomer a run for its money. Like CEZ, these ETFs operate in the emerging market space with some tweaks.
Apart from these, the emerging market equities space is primarily dominated by two large players – VWO and EEM – with funds under management an impressive $34.6 billion and $24.3 billion, respectively. While VWO's expense ratio of 0.15% is far less than CEZ, EEM charges a higher fee of 72 basis points.
Despite the competition, the newly launched fund has the potential to emerge as a winner if it manages to generate returns net of fees greater than other products in the emerging market ETF space. In any case, the smart-beta theme is trending and many are trying out this concept for their own portfolios.
