Emerging market ETFs lack nuance: JP Morgan

By Jessica Yun
 — 1 minute read

Emerging markets equities are so diverse that a passive investment strategy could expose investors to risks, according to JP Morgan – but BetaShares has cited figures that indicate active does not necessarily outperform passive in this regard.

Speaking to InvestorDaily, JP Morgan Asset Management global market strategist Kerry Craig said many investors who deemed emerging markers “too risky (or volatile)” were overlooking some significant sources of long-term returns.

While the choice between an active or passive strategy would come down to personal preference, Mr Craig indicated a passive approach would be ill-suited to the intricacies of investing in emerging markets.


“My view is that because emerging market equities represent such a diverse array of companies with potentially very different risk and return factors, this is an asset class where a more nuanced and engaged approach is better suited,” Mr Craig told InvestorDaily.

“Emerging markets equities have such a diverse array of drivers of both economic growth and corporate earnings, approaching the market purely via a passive, market-cap weighted index tracking strategy can expose the investor indiscriminately to all that is good from investing in the fastest growing part of the world as well as all the risks, some of which may be unnecessary.”

Among the 1,100 companies across 24 countries within the MSCI Emerging Markets Index, the companies ranged from commodity importers, commodity exporters, while some had varying levels of external exposure, and some had central banks either hiking or cutting interest rates.

“Then there is the political and governance risk that comes with investing in various countries,” Mr Craig added.

“Tracking an index takes no account of how these factors can impact returns, whereas bottom-up stock selection does.”

He likened investing in emerging markets as “looking at a bowl of jelly beans”.

“You can grab a handful and get a mish-mash of flavours which might taste good, but run the risk of getting the aniseed one. It’s better to pick through the bowl and sort the flavours for the tastiest ones.”

However, BetaShares chief executive Alex Vynokur told InvestorDaily that while some argued “market inefficiencies” in emerging markets created opportunities for active managers, this position was not backed up by numbers.

“The results for the two categories show that average active managers do not necessarily fare better than their benchmarks.

“In fact, according to the data from the latest S&P SPIVA report over 1-, 3-, 5-, and 10-year periods, the majority of active managers in those two categories have overwhelmingly underperformed,” Mr Vynokur said.

“For emerging markets in particular, over 75 per cent of active managers have failed to beat their benchmark net of fees over each of those periods.”

He added: “Again, whilst we certainly believe that some active managers can deliver value to investors, we think it is important to conduct careful analysis using real performance data.”


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Emerging market ETFs lack nuance: JP Morgan
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