With the chart of the iShares MSCI Emerging Markets ETF (EEM) continuing to show improvement, we highlight how to use the new Custom Models tool to separate the China allocation within your emerging markets portfolio by combining the KraneShares Dynamic China Rotation Model (KRANEDYNAMIC.TR) and the KraneShares MSCI Emerging Markets ex-China Index ETF (KEMX.TR).
The emerging markets space has certainly had its ups and downs throughout 2019, as can be seen through the point and figure chart of the iShares MSCI Emerging Markets ETF EEM. This fund showed significant gains during the first several months of the year, giving three consecutive buy signals before experiencing increased volatility over the summer that ultimately led to two consecutive sell signals by the end of August. However, the past few months have seen more positive movement, as EEM rose to give a buy signal in October that also moved the fund back to a positive trend, and most recently reversed back up into a column of X's in trading Wednesday to set up its first series of higher bottoms since April.
While the technical picture for EEM has improved, the fund is still hovering right around the sought-after 3 score-line (2.92 fund score as of 12/10), and the emerging markets representative continues to trail its developed counterpart, the iShares MSCI EAFE ETF EFA, on a year-to-date performance basis, with a 10.21% gain relative to a 16.29% gain, respectively. Given the volatile nature of emerging markets already, many of you may be seeking a way to improve the returns of your exposure to this area while simultaneously reducing the overall fluctuation in your portfolio. Fortunately, you now have the ability to test your own combinations of international securities or models using the new Custom Modeler tool on the Nasdaq Dorsey Wright research platform. For those that have not seen the tool yet, please reference the replay of our webinar-style walkthrough, which was available in yesterday’s Daily Equity & Market Analysis report.
For our example today, we will take a look at separating the China allocation within your emerging markets portfolio by combining the KraneShares Dynamic China Rotation Model KRANEDYNAMIC.TR and the KraneShares MSCI Emerging Markets ex-China Index ETF KEMX.TR. In order to get a guideline for our static allocation to each area, we will use the MSCI Emerging Markets Index target allocation as demonstrated through the largest emerging markets fund, the iShares MSCI Emerging Markets ETF EEM. As we have referenced in prior NDW research articles, the 4th quarter of 2019 marked the start third and final integration of China A Shares into MSCI emerging market indices, which will lead to a target allocation of over 40% exposure to China once these are fully implemented. So for today’s model, we will assign a 40% static allocation to KRANEDYNAMIC.TR, and a 60% allocation to KEMX.TR. We will also allow a 5% allocation drift, and rebalance semi-annually. Our benchmark will be the total return ticker for the iShares MSCI Emerging Markets ETF EEM.TR.
Once the required information is inputted, you can view the model preview by clicking on the “Preview” button in the upper right-hand corner of the page. This brings you to a Model information page that includes return and risk comparison metrics relative to the selected benchmark. Here we see that our combined portfolio offers better risk-adjusted returns, through the Sharpe Ratio of 0.56 compared to 0.32, as well as a more bearable max 6-month drawdown and lower relative-risk (rRisk) numbers. This demonstrates some of the benefits of applying a tactical approach to your China allocation, which could further serve as a proven value add to your clients and separate yourself from the continuously-tightening pack of financial advising.
Saving this model will allow you to come in and view the portfolio as you would any other model on our platform, including the current holding information as well as any of the other new risk metrics associated with the portfolio. One important point to note, however, is that this new custom model will not alert you to changes within the KraneShares Dynamic China Rotation Model; that would only be available by setting alerts on the underlying portfolio itself. If you have any further questions on the new custom models tool and how it can be utilized, please reach out to us at dwa@dorseywright.com or by phone at (804) 320-8511.
