IShares Emerging Markets Equity Factor ETF EMGF changed its target index in early 2023. But its risk factor exposures don't fully explain its historical performance relative to the MSCI Emerging Markets Index, adding uncertainty to its future performance.

This exchange-traded fund changed its target index to the Stoxx Emerging Markets Equity Factor Index from the MSCI Emerging Markets Diversified Multiple-Factor Index on March 1, 2023, leading to a substantial shift in its risk/reward profile. The new index enforces a 1% tracking-error constraint to the broader emerging-markets universe. So, it shouldn't stray too far from the market, which limits its ability to outperform.

The underlying strategy targets stocks with a strong combination of low price multiples, high-quality financial statements, strong recent performance (momentum), small market capitalizations, and low volatility. These risk factors have long-term merit on their own, but the strategy places greater emphasis on the first three. The remaining two shouldn't contribute much to its index-relative performance.

An optimizer selects and weights stocks in a way that tries to maximize the portfolio's exposure to those with a strong combination of risk factors while honoring several constraints. On top of the 1% tracking-error requirement, country and sector weights must remain within prescribed tolerances. The latter two limit the final portfolio's exposure to the momentum factor because it tends to overweight the best-performing stocks, sectors, and countries.

Value, quality, and momentum all find their way into the portfolio, though not in a strong way. The ETF holds almost 600 stocks, while its average price multiples and profitability reflect a modest emphasis on the value and quality risk factors. The new index outperformed the MSCI Emerging Markets by 1.7 percentage points per year between January 2003 and December 2023. However, risk factor exposures appear to account for only a portion of its advantage.

Analyst Rating

A new target index does not appear to offer much improvement.

Senior Analyst

Daniel Sotiroff

JPMorgan BetaBuilders Canada ETF

Premier Financial

Becton, Dickinson and Co.

Independence Holding Company

American Shared Hospital Services

Salisbury Bancorp

Bridgepoint Education

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Eastside Distilling

Vail Resorts

This multifactor strategy targets reasonable risk factors without incurring too much active risk. But the process is difficult to unpack, and risk factor exposures don’t explain all its historical index-relative performance. It earns a Below Average Process Pillar rating.

Below Average

Process

Industry-leading technology and BlackRock's global footprint support a strong team of portfolio managers, earning an Above Average People rating. The team employs BlackRock's Aladdin platform to fulfill much of its portfolio management tasks, and global trading desks allow traders to conduct foreign transactions in a cost-effective manner.

The iShares Index Equity team has responsibility for this fund’s tracking performance. This large global team limits the impact of personnel turnover when it occurs. The team uses BlackRock’s Aladdin platform to handle many of their day-to-day tasks, and most of the workflow is automated. Managers will get more involved with index changes and rebalances, some voluntary corporate actions, and approving trades.

BlackRock's global trading desk handles all transactions and taps into local markets for more cost-effective execution. An independent risk committee oversees the fund’s tracking performance and ensures it remains within established boundaries.

Above Average

People

BlackRock offers compelling options across asset classes and vehicles. It earns an Above Average rating for Parent. 
The firm’s approximately USD 8 trillion in assets under management, as of Sept. 30, 2022, gives it unparalleled scale and influence. It is a market-leading index fund provider globally, and its iShares exchange-traded fund franchise offers a low-cost lineup of core funds that investors can use to build a well-diversified portfolio for dirt cheap. The firm can be more adventurous in its ETF launches than some peers, so not everything it launches is appropriate for the masses. As a result, it is likely to have more ETF closures than peers that stick to the basic building blocks.  
The firm’s active fixed-income and multi-asset efforts also stand out as some of the best in the industry. Those benefit from BlackRock’s commitment to building a first-class risk management system via its Aladdin analytics software. The software is also available for sale to other firms and has proved to be a popular option for competitors, a testament to its usefulness. 
More recently, the firm has shifted its focus to ESG offerings and incorporating ESG across its investment lineup, leading to a political backlash in the United States.
BlackRock isn’t the best at everything it tries to do, but retail investors, financial advisors, and large institutions could all build robust portfolios using BlackRock’s products.

Parent

iShares MSCI Emerging Markets Multifactor ETF

EMGF tracks an index of large- and mid-cap emerging market firms, selected and weighted to increase exposure to quality, value, momentum and size.

EMGF tracks an index of large- and mid-cap equities from emerging markets. Stocks are selected and weighted to optimize exposure to five factors: quality, value, momentum, smaller size and low volatility.

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