The exchange traded fund industry has been taking giant strides over the past two decades. There are currently a little less than 1,650 exchange traded products listed in the U.S., nearly $2 trillion in assets under management. As a result, more and more issuers are jumping on the bandwagon of ETF launches.

Bolstered by this trend, J.P. Morgan, which entered the ETF industry last June, has rolled out its third product in the emerging market arena. Like its two other products, The JPMorgan Diversified Return Global Equity ETF (JPGE) and JPMorgan Diversified Return International Equity ETF (JPIN), the new JPMorgan Diversified Return Emerging Market ETF (JPEM) also follows a smart-beta technique (read: J.P. Morgan Debuts JPGE, a Smart Beta ETF).

JPEM in Focus

The fund seeks to track the FTSE Emerging Diversified Factor Index. This new fund has a unique approach to emerging market investing, picking stocks from the large- and mid-cap securities from advanced and secondary emerging markets based on three factors: value, momentum and quality. The stocks are spread across various industries.

The fund gives exposure to about 447 securities. iShares MSCI India ETF (INDA) (read: India ETFs: Best of the BRICs Now?), Taiwan Semiconductor and China Mobile are currently its top three holdings. The fund does not bear company-specific concentration risks as no stock accounts for more than 3% of the portfolio. However, the fund’s top holding, which is itself an ETF on India, takes about 8% of the total portfolio. The fund charges 45 basis points as net annual fees.

How Might it Fit in a Portfolio? 

The fund is an intriguing option for investors willing to look at products that follow a smart beta strategy. Meanwhile, it could also be a solid choice for those who want to tap into emerging market growth. Though the rates have cooled down in recent years, these are still way better than the rates of several developed nations reeling under pressure.

In fact, most emerging markets have shrugged off policy tightening concerns in the U.S. to start 2015 and are leading or lagging on their own strength. Still, given global growth worries and policy differentials among global superpowers, investors need to be watchful while picking up emerging market stocks (read: 3 Emerging Market ETFs That Soared in 2014).

JP Morgan’s smart beta approach will help investors to strike the right balance. Its strategy adopts a “middle path” between passive investing and active investing. Though not so popular among retail investors, these strategies have become quite popular among institutional investors. The index attempts to choose stocks that have a better chance of delivering risk-adjusted returns, based on certain fundamental characteristics.

ETF Competition
 

Though the emerging market space is teeming with products, the newly launched ETF should not face many obstacles in amassing assets thanks to its unique exposure. The stock selection technique of the new entrant will set it apart from the whole lot.

Having said this, products likeiShares MSCI Emerging Markets Minimum Volatility Index Fund (EEMV), PowerShares S&P Emerging Markets Low Volatility Portfolio (EELV), FTSE RAFI Emerging Markets Portfolio (PXH), PowerShares DWA Emerging Markets Technical Leaders Portfolio (PIE) and  FlexShares Morningstar Emerging Market Factor Tilt Index ETF (TILT) might give the newcomer a run for its money. These too are not plain vanilla ETFs and operate in the emerging market space with some tweaks.  

Apart from these, the emerging market equities space is primarily dominated by two large players – Vanguard FTSE Emerging Markets ETF (VWO) andiShares MSCI Emerging Markets ETF (EEM) – with the funds managing an impressive $45.3 billion and $32.0 billion, respectively. While VWO charges far less than JPEM, EEM charges a higher fee of 67 basis points.

Despite the competition, the newly launched fund has a fair chance of making a name for itself if it manages to sell itself by endorsing the “Smart Beta” strategy. In any case, the smart-beta theme is in and many are trying out this concept for their own portfolios. Added to this, J.P. Morgan’s enormous brand name might help it to outperform its competitors and accumulate a solid asset base.