State Street seems enthralled by the ‘quality’ theme in ETF offerings. At least, three launches targeting Europe, Australia and the Far East (EAFE), emerging markets as well as the global markets and six launches focusing on Australia, Canada, Germany, Japan, Spain and the U.K. in June give such cues. Notably, more than 50% of its offerings this year revolve around these ‘quality’ characteristics.
There is no doubt that high quality or low volatility aspects deserve special attention at the current level given the recurrence of volatility in the global markets. Possibility of hike in interest rates in the U.S. next year, deflationary worries in the Euro zone, slowdown in China, and moderation in Japanese growth might trigger off market volatility in the near term.
To guard against such potential threats, State Street recently came up with three ETFs targeting Mexico, South Korea and Taiwan. The trio – SPDR MSCI Mexico Quality Mix ETF (QMEX), SPDR MSCI South Korea Quality Mix ETF (QKOR) and SPDR MSCI Taiwan Quality Mix ETF (QTWN) – hit the market on September 18.
Newly Launched ETFs in Focus
The funds look to reproduce the performance of value, low volatility and quality factor strategies. The underlying indexes for these funds are equal-weighted combinations of the three MSCI Factor Indices: the MSCI Value Weighted Index, the MSCI Minimum Volatility Index, and the MSCI Quality Index meant for the three aforementioned nations.
SPDR MSCI Mexico Quality Mix ETF: The 32-stock fund looks to track the performance of the MSCI Mexico Quality Mix A-Series Index. Individual holding wise, the index has heavy weight on America Movil (18.96%) followed by Fomento Economico Mexicano (7.16%) and Wal-Mart de Mexico (6.8%).
Sector wise, consumer staples and telecom account for respectively 29.5% and 18.8% of the fund while industrials (14.5%), materials (12.7%) and financials (12.5%) round out the top five spots. The fund charges about 40 bps in yearly fees.
SPDR MSCI South Korea Quality Mix ETF: By holding about 104 stocks, the fund intends to track the performance of the MSCI South Korea Quality Mix A-Series Index. Sector wise, IT takes the top spot with more than 29% of total assets while consumer discretionary (21.7%), financials (14.6%), consumer staples (9.7%) and materials (6.5%) complete the top five sectors.
The fund has company-specific concentration risk with Samsung (14.45%) ruling the portfolio. Hyundai Motor (4.94%) and Hyundai Mobis (3.9%) round out the top three positions. QKOR also charges 40 bps in fees.
SPDR MSCI Taiwan Quality Mix ETF: This ETF looks to track the MSCI Taiwan Quality Mix A-Series Index to produce a reduced level of volatility. QTWN has about 102 stocks in its basket. Here also, the portfolio has a slight concentration risk. Taiwan Semiconductor takes the top spot with about 12.9% focus. After that, none of the companies in the index account for more than 6.5% of assets.
The fund has a tilt toward the IT sector with about three-fifth of the portfolio invested in it. QTWN charges the same fees as the two other products.
How Could They Fit in a Portfolio?
These ETFs could be exciting picks for investors seeking exposure in the above-mentioned nations, while maintaining their hawkish stance as they stay invested in those markets. These markets undoubtedly hold potential but investors might look for value factors given the unsteady world market recovery.
The Mexican economy started off the year on a weak footing, but performed impressively in Q2. The revival in the U.S. – Mexico’s key export destination – helped it post strong growth. Deputy Finance Minister of Mexico expects growth to expedite in the second half of the year.
South Korea recently launched a stimulus plan to boost its weakening economy. And as far as Taiwan is concerned, the nation has been an investment hot spot for quite some time. As per Wall Street Journal, the appeal of Taiwanese technology companies was the reason behind the attention.
All these should urge investors to focus on the said nations. But foreign market investments are always associated with instability which calls for focus on high quality stocks.
Even though the ETF industry has been witnessing a dash of smart-beta, low volatility and high quality launches in the recent past, the space still has room for growth. The products already available in the space are PowerShares S&P 500 High Quality Portfolio (SPHQ), MSCI USA Quality Factor ETF (QUAL), MSCI International Quality ETF (QXUS) and MSCI USA Value Factor ETF (VLUE). State Street itself has shown keen interest in the quality ETF space.
However, we do not expect the new launches to face tough competition as these are country-specific. There are several products targeting Mexico, South Korea and Taiwan, but mostly do not contain 'quality' features. Thus, to amass investors’ money, the issuer just needs to sell its investment objective, in our opinion.
PWRSH-SP5 HQ (SPHQ): ETF Research Reports
To read this article on Zacks.com click here.
Zacks Investment Research is characterized by a team of experts who are passionate about your investing success and is focused on sharing the same reliable investment research they would want for themselves.