Investors around the world are increasingly turning their attention to actively managed exchange-traded funds (ETFs) focusing on emerging markets. In the $348 billion market dedicated to ETFs investing in developing-nation assets, a mere 5% are actively managed. Yet, this small fraction has attracted over a third of the new investment in the past year, and more than half in the last month alone.
Donald Calcagni, chief investment officer at Mercer Advisors Investment Management, emphasizes the current global market dislocations and valuation concentrations as prime reasons for adopting a more systematic approach to active management in emerging markets.
Emerging-market stocks are currently trading at a discount of approximately 43% compared to their U.S. counterparts, nearing the largest valuation gap on record. This significant difference is prompting Wall Street, including those traditionally less invested in overseas markets, to recognize the undervalued nature of developing-nation stocks as an opportune investment moment.
The trend towards investing in ETFs that focus on emerging assets is driven by the allure of lower fees and the avoidance of cross-border trading complexities. This movement has reignited discussions on the potential of active strategies to deliver stronger returns compared to their passive counterparts.
Patrick Maynor, head of equities at Trusted Capital Group, ventured into emerging-market funds by investing in the Avantis Emerging Markets Equity ETF (AVEM, Financial) in April 2023. Since then, the ETF has seen a nearly 13% total return, outperforming its benchmark by 3 percentage points. Maynor's decision was influenced by the attractive valuations in developing equity markets and the diversification benefits for his firm's $7 billion asset portfolio.
Actively managed EM ETFs, particularly those managed by Avantis Investors and Dimensional Fund Advisors, have captured more than 95% of the past year's inflow. These funds are noted for their lower-than-average fees and history of outperforming passive benchmarks.
Avantis, responding to strong demand, has recently introduced new emerging-market ETFs, including the Avantis Emerging Markets ex-China Equity ETF (AVXC, Financial). This move reflects a broader industry trend, with 27 new emerging-market ETFs launched in the U.S. since last year, 18 of which are actively managed.
AVEM's strategy, which includes a significant allocation to Chinese assets, has returned over 15% for investors in 2023, surpassing its benchmark's 11.7% return. This performance is notable even as it maintains a substantial exposure to China, a region where equities have faced challenges.
Investors are showing a preference for emerging-market portfolios that offer a nuanced approach beyond traditional indexing strategies. This trend is exemplified by the launch of AVXC, which targets emerging markets excluding China, highlighting a strategic bet on diversification within the asset class.
