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A Tactical Emerging Markets Idea

September 13, 2017: 08:37 AM ET

Many diversified emerging markets exchange-traded funds are heavily allocated to Asia. Whether those funds track the MSCI Emerging Markets Index, related benchmarks or not, the prominence of Asian countries is supposedly diversified emerging markets funds is reflective of the continent's stature in the MSCI benchmark.

Investors looking to remove the clutter of Emerging Europe and Latin America while focusing solely on emerging Asian opportunities have some ETFs to consider, including the iShares MSCI Emerging Markets Asia ETF (NASDAQ: EEMA).

The iShares MSCI Emerging Markets Asia ETF, which is 5.5 years old, is up about 33 percent year to date compared to a gain of around 30 percent for the widely followed MSCI Emerging Markets Index.

By virtue of its focus on a specific region, EEMA features a smaller roster than the MSCI Emerging Markets Index. The dedicated Asia ETF holds about 570 stocks compared to just over 850 in the MSCI Emerging Markets Index.

As a cap-weighted ETF, EEMA's geographic exposures are not surprising. China, the world's second-largest economy and the largest developing economy, is over 40 percent of the ETF's weight. South Korea, Asia's fourth-largest economy; and Taiwan combine for 36.4 percent of EEMA's weight. The MSCI Emerging Markets Index allocates “just” 55 percent of its weight those three countries.

Related Link: Considering Low Vol ETFs

India, Asia's third-largest economy, is nearly 12 percent of EEMA's lineup, meaning the ETF is overweight Indian stocks by about 350 basis points relative to the MSCI Emerging Markets Index.

In recent years, technology's weight in the MSCI Emerging Markets Index has been increasing, but that is mostly thanks to Asian economies. So for investors who want even more technology exposure while gaining a somewhat diverse spin on emerging Asian equities, EEMA is an ETF that makes the cut. The fund devotes over 36 percent of its weight to technology stocks compared to 26 percent in the MSCI Emerging Markets Index.

That is where South Korea and Taiwan help EEMA. Massive percentages of the equity market capitalizations in those countries are attributable to the technology sector.

South Korea and Taiwan help EEMA in another way. Historically, those countries are among the least volatile emerging markets. As a result, EEMA's three-year standard deviation is 100 basis points below the comparable metric on the MSCI Emerging Markets Index.

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