CFRA Research Eyes Emerging Markets ETF

12/07/2018 5:00 am EST

Focus: ETFS

Todd Rosenbluth

Senior Director of ETF & Mutual Fund Research, CFRA Research

Rather than relying solely on past performance, CFRA combines holdings-level analysis with additional fund characteristics, such as expense ratio and trading costs, to rate more than 1,100 equity ETFs, observes Todd Rosenbluth, ETF specialist and analyst with CFRA Research.

The CFRA Focus ETF for December is SPDR Portfolio Emerging Markets ETF (SPEM). CFRA thinks investors should and will continue to allocate to emerging market equities for 2019 and we think SPEM provides an appealing portfolio with low management and trading costs.

After double-digit percentage gains in 2016 and 2017, including a 35% climb last year, this emerging markets ETF reversed course and was down 13% year-to-date through November 26.

The sell-off occurred amid investor concerns about trade tensions between China and the U.S., political uncertainties and a general rotation away from higher-risk assets as interest rates rose in the U.S. Yet, CFRA thinks a potential willingness by the U.S. and China to resume trade negotiations could provide a global equity catalyst.

While SPEM is diversified geographically and includes exposure to Latin American, Europe and Africa, Asian markets China (32% of assets), India (14%) and Taiwan (14%) are the three largest countries. SPEM tracks the S&P Emerging Broad Market Index, which does not include South Korea, as some emerging market ETFs do.

From a bottom-up perspective, CFRA finds the securities inside SPEM to be appealing. Indeed, six of the top-10 recent holdings are CFRA Strong Buy or Buy recommendations, one is a Hold and the three others are not rated using CFRA STARS.

In addition to a portfolio of securities CFRA finds attractive based on our qualitative STARS and our quantitative Fair Value assessments, the fund also earns a favorable rating input from a quality perspective. Many of SPEM’s holdings earn above-average S&P Global Market Intelligence Quality Rankings.

Meanwhile, the portfolio earns a positive input for the S&P Global Credit Ratings of the parent companies. From a sector perspective, financials (27% of assets), information technology (15%) and consumer discretionary (13%) are the largest sectors, while health care (3%) and utilities (3%) are relatively low.

At the fund level, SPEM earns positive cost factor rating inputs from CFRA. Volume has picked up in recent months and the shares now trade more than 800,000 shares daily with a tight bid/ask spread.

Meanwhile, following a significant expense ratio cut in October 2017, SPEM now charges 0.11%, making it two or three basis points cheaper than iShares Core MSCI Emerging Markets (IEMG), Schwab Emerging Markets (SCHE) and Vanguard FTSE Emerging Markets (VWO).

While CFRA thinks investors need to go beyond this cost metric, we realize increasingly investors are starting their ETF homework here. Well-informed investors will assess more than costs. For example, IEMG has significant exposure to South Korea (14% of assets), while its peers do not.

Year-to-date, SPEM has gathered approximately $1 billion, despite a negative total return. The cash haul is second only to IEMG among the quartet of low-cost, diversified emerging market funds.

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