Diversified Emerging Market Exchange-Traded Funds and the Search for Positive Alpha

This article analyzes the performance of diversified emerging market exchange-traded funds (DEMETFs) from December 2002 to August 2022. The findings indicate that US investors benefited from the diversification provided by DEMETFs. In comparison to global equities, an equally weighted portfolio of DEMETFs showed superior performance in both absolute and risk-adjusted terms. However, US equities slightly outperformed DEMETFs. During the 2007–2008 economic crisis, an equally weighted portfolio of DEMETFs demonstrated greater resilience and outperformed both US and global equities. The study also reveals that portfolio managers exhibited superior security selection skills, as an equally weighted portfolio of DEMETFs generated a statistically significant positive alpha. This suggests that the monthly returns of these funds were influenced by systematic factor exposures rather than random variation, indicating the consistent presence of underlying market factors. Furthermore, DEMETFs displayed responsiveness to various factors such as the overall stock market, credit risk, and slope of the US Treasury yield curve.