Beyond U.S. equities, fertile ground for the spate of fundamentally-indexed or smart or strategic beta exchange-traded funds that have come to market over the past several years include emerging markets.
Investors have a wide array of options from which to choose when it comes to emerging markets ETFs that adhere to methodologies extending beyond traditional cap weighting. One of the more seasoned names among strategic beta emerging markets ETFs is the FlexShares Morningstar Emerging Markets Factor Tilt Index Fund (Flexshares Trust (NYSE:TLTE)).
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TLTE, which is just a few weeks' shy of its fourth anniversary, follows the Morningstar Emerging Markets Factor Tilt Index. In the case of TLTE, the tilt is toward two of the staples of factor-based investing: Value stocks and small caps. Nearly 56 percent of TLTE's holdings are value stocks, but just over 17 percent are growth names, according to issuer data.
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TLTE's underlying index measures the performance of stocks located in emerging countries across the world (as defined by Morningstar) with increased exposure to small-capitalization and value stocks. Stocks that are deemed to be small capitalization or small value have an overweighting in the index compared to their weight in a corresponding market-capitalization-weighted index. Likewise, stocks designated as "large" or "growth" stocks have underweighting compared to a standard market-capitalization weighting, according to FlexShares.
Like standard emerging markets ETFs, TLTE's largest sector allocation is financial services. TLTE devotes nearly 23 percent of its weight to that sector, though the ETF is underweight technology relative to the MSCI Emerging Markets Index. TLTE is overweight materials and energy names with a combined weight to those sectors of over 16 percent compared to under 14 percent for the MSCI Emerging Markets Index.
Although TLTE is overweight commodities sectors, the ETF's combined weight to commodities exporters Brazil, South Africa and Russia is 15 percent compared to 17.2 percent for the MSCI benchmark. That difference, though slight, is likely part of the reason why TLTE is slightly trailing the MSCI Emerging Markets Index this year.
However, TLTE has been 5.5 percent less bad than the MSCI index since the ETF debuted nearly four years ago.
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