3 Reasons to Try Active Emerging Markets ETFs

Active emerging markets ETFs are presented as a compelling avenue for international equity diversification, particularly as broader international equities' recent performance largely stemmed from U.S. market dynamics. These funds offer a cost advantage over developed markets and leverage active management to identify high-potential, younger companies poised to capitalize on global trends. The Avantis Emerging Markets Value ETF (AVES) exemplifies this, returning 13.5% over three months by actively investing in value-oriented emerging market equities, outperforming its category and segment averages.

Analysis

The case for actively managed emerging markets (EM) ETFs is being presented as a strategic alternative for international diversification, especially as the recent outperformance of broad international funds was heavily influenced by a temporary downturn in U.S. stocks. The argument rests on three core pillars: favorable valuations, the benefit of active management, and long-term growth potential. EM equities are currently priced at a discount relative to their developed market counterparts, creating a potential runway for significant appreciation. Active management is positioned as the key to unlocking this value, enabling portfolio managers to use fundamental research to select high-quality companies and avoid weaker ones. Furthermore, emerging markets are home to younger companies well-positioned to capitalize on major global trends such as e-commerce. The Avantis Emerging Markets Value ETF (AVES) is highlighted as a prime example, having delivered a 13.5% return over the last three months, which notably outperforms its ETF Database Category average of 10.5% and its FactSet Segment average of 11.8%. AVES's strategy, which costs 36 basis points, focuses on value-oriented firms with low price-to-book ratios and strong profitability metrics, such as cash flow and revenue, demonstrating a tangible application of the active thesis.

Key Decisions for Investors

• Investors seeking to augment their international equity holdings should evaluate actively managed emerging markets ETFs as a means to capture potential alpha from current valuation disparities with developed markets.
• Consider conducting due diligence on the Avantis Emerging Markets Value ETF (AVES), given its recent 13.5% three-month return and its specific active strategy targeting value and profitability which has outperformed its peers.
• Monitor the performance persistence of active EM managers against passive EM indices to ensure the management fee, such as the 36 basis points for AVES, is justified by consistent alpha generation.
• For long-term allocations, assess the sectoral and geographical exposures within active EM funds to ensure alignment with key global growth themes like technology and consumer trends.