Thanks to plunging oil prices and uneven economic growth in the developed world, many of the emerging market stocks and bonds have seen renewed interest among investors. Investors are reallocating their portfolios to include emerging market products as they offer higher growth rates and are quite attractively valued (read: Best and Worst Emerging Markets ETFs in Focus).
Following this trend, KraneShares has recently launched a new fund which provides exposure to the emerging market space. The fund – KraneShares FTSE Emerging Markets Plus ETF – trades under the ticker KEMP and charges 68 basis points as fees.
KEMP in Focus
The passively managed ETF seeks to track the results of the FTSE Emerging incl China Overseas non-R/QFII GDP Weighted Index. In this GDP weighted index, the emerging markets with the largest GDPs have the heaviest weightage in the underlying index. Also, country allocations are based on five-year purchase power parity GDP forecasts by the International Monetary Fund.
With this approach, the fund provides the greatest exposure to China (including China A shares and China N shares) with a little less than half of the fund assets, followed by India with 17.1% exposure. China A shares are China equities listed on the Shanghai or Shenzhen stock exchanges, while China N shares are China equities listed on the New York or NASDAQ stock exchanges. On the other hand, Brazil, Mexico and Russia have single low-digit exposure in the fund.
How Might it Fit in a Portfolio?
The fund is an interesting option for investors looking to invest in the emerging markets. Though the growth rates in the emerging markets have cooled off in recent years, they are still a lot better than that of several developed nations
Nonetheless, given the global growth concerns, investors should cautiously approach this space. China’s GDP growth rate had fallen to a 24-year low in 2014, while the country is also seeing credit crunch concerns, a property market slump and a lagging manufacturing sector. The country’s People’s Bank of China (PBOC) has lately resorted to several monetary easing policies to boost the country’s economy (read: Policy Easing Puts China ETFs in Focus).
On the other hand – India – which relies on imports for 80% of its energy needs has been one of the biggest beneficiaries of slumping oil prices. Sliding crude prices have helped the country to narrow down its trade and budget deficit and have also pulled the reins on inflation. With cooling inflation numbers, the county’s central bank has recently cut its key benchmark lending rates and might even continue with its dovish stance if oil prices continue to stay low. This is expected to boost the country’s growth rate.
ETF Competition
The emerging market equities space is primarily dominated by two large players – Vanguard FTSE Emerging Markets ETF (VWO) and iShares MSCI Emerging Markets ETF (EEM) – managing an asset base of $46.3 billion and $31.7 billion, respectively. VWO provides 24% exposure to China, followed by 14% to Taiwan and 12% to India. On the other hand, EEM allocates 21.6% of funds to China, followed by 14.5% and 12.7% respectively to Korea and Taiwan.
iShares Core MSCI Emerging Markets ETF (IEMG – ETF report), WisdomTree Emerging Markets High-Yielding Equity Fund (DEM – ETF report) and iShares MSCI Emerging Markets Minimum Volatility Index Fund (EEMV – ETF report) are some of the other funds in this space (see Broad Emerging Market ETFs here).
Though the newly launched fund uses a different approach in choosing the weights for country allocation, it is nonetheless expected to face competition from the top players in the space.
