BlackRock has launched two new single-factor ETFs in the US providing exposure to emerging market stocks with strong quality or value characteristics.
Focusing on quality and value factors can help mitigate the risks of emerging market stocks.
The iShares MSCI Emerging Markets Quality Factor ETF (EQLT US) and iShares MSCI Emerging Markets Value Factor ETF (EVLU US) have been listed on Cboe BZX Exchange, each with an expense ratio of 0.35%.
Single-factor ETFs allow investors to target specific factors that have historically been associated with higher returns over the long term. By concentrating on a single factor, investors can potentially capture this excess return more effectively than in a multi-factor or broad market strategy.
Additionally, single-factor strategies provide the flexibility to customize portfolios according to individual risk tolerance, investment horizon, and market outlook.
Quality and value factors may be particularly appealing for emerging market investors due to the heightened volatility associated with the segment. A quality factor approach typically focuses on financially stable companies with strong fundamentals, potentially reducing risk, while value stocks tend to be less volatile and have more stable earnings, which can provide a cushion during market downturns.
Methodology
EQLT and EVLUE are linked to the MSCI Emerging Markets Quality Factor Select Index and MSCI Emerging Markets Value Factor Select Index, respectively.
The underlying indices filter the broader MSCI Emerging Markets Index for stocks that exhibit strong quality or value characteristics.
For the quality factor, each security is assigned a score based on three key financial metrics: Return on Equity, Debt to Equity, and Earnings Variability.
For the value factor, a score is calculated using three valuation metrics: Price to Expected Earnings, Price to Book Value, and Enterprise Value to Operating Earnings (cash flow).
Each index then selects the top-ranked stocks based on these quality or value scores, with the aim of capturing a specific percentage of the market capitalization within each country in the broader index — 50% for the quality index and 30% for the value index.
Initially, the indices are weighted by float-adjusted market capitalization, but they are then tilted to give greater emphasis to stocks with higher quality or value scores relative to their peers. This approach also seeks to minimize extreme deviations in stock, sector, and country exposures compared to the parent index.
The indices are fully reviewed and rebalanced semi-annually.