WisdomTree has rolled out a new ETF in Europe providing exposure to emerging market equities while excluding firms with significant government ownership.

Alexis Marinof, Head of Europe, WisdomTree.

The WisdomTree Emerging Markets ex-State-Owned Enterprises ESG Screened UCITS ETF has been listed on London Stock Exchange in US dollars (XSOE LN) and pound sterling (XSOP LN) as well as on Xetra (XSOE GY) and Borsa Italiana (XSOE IM) in euros.

The fund replicates the strategy behind the NYSE Arca-listed WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (XSOE US) which launched in 2014 and currently houses nearly $5 billion in assets.

Alexis Marinof, Head of Europe at WisdomTree, said: “XSOE is the first of its kind in Europe. This represents the latest example of WisdomTree’s focus on delivering unique exposures as we continue to build on our differentiated and innovative product range.”

According to WisdomTree, the rationale for avoiding state-owned enterprises (SOEs) is that government ownership may negatively impact a company’s operational aspects due to the firm being influenced by a broader set of interests beyond generating profits for shareholders.

Aneeka Gupta, Director of Research at WisdomTree, explained: “Over time, government influence on SOEs can lead to quite large but fairly inefficient businesses. This influence can stagnate the long-term growth potential of these companies in their respective emerging markets economies. A large portion of existing emerging market indices is made up of SOEs, increasing the risk investors are taking with their emerging market exposure.

“SOEs also tend to be found in old economy sectors and are generally less dynamic and innovative than companies in thriving new economy sectors. We anticipate emerging market growth to come from the innovative corners of the market and companies displaying strong fundamentals, two areas non-SOEs in emerging markets have a clear advantage.”

WisdomTree notes the strategy’s success is reflected in recent performance figures. Emerging market non-SOEs outperformed SOEs by 93.8% since the beginning of 2008 including 28.7% following the Covid-19 market crash in March 2020 (data based on comparing SEOs and non-SEOs from within the MSCI Emerging Markets Index).

WisdomTree further believes that current conditions are generally supportive of investing in emerging markets including tailwinds such as a weaker US dollar, rising inflation, attractive valuations, and higher commodity prices.

Methodology

The ETFs’ underlying reference is the proprietary WisdomTree Emerging Markets ex-State-Owned Enterprises ESG Screened Index.

Index construction starts from an initial universe of stocks listed in 17 emerging markets countries – Brazil, Chile, China, Czech Republic, Hungary, India, Indonesia, Korea, Malaysia, Mexico, the Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. Eligible companies must have market capitalizations greater than $1 billion and average daily trading volumes of at least $100,000.

SOEs – defined by WisdomTree as companies with government ownership exceeding 20% – are removed from the universe.

The methodology also includes a screen based on environmental, social, and governance (ESG) criteria whereby violators of UN Global Compact principles as well as companies involved in controversial weapons, tobacco, or thermal coal activities are removed.

The remaining constituents are weighted by market capitalization while maintaining the same country weights as the initial universe as well as a maximum sector deviation of 3%. Chinese A-share exposure is capped at 5%.

The index is reconstituted and rebalanced annually in October.

Approximately one-third (31.5%) of the index is currently allocated to Chinese stocks with Taiwan, South Korea, and India also playing notable roles with weights of around 15% each. Information technology and consumer discretionary stocks each account for weights of approximately 20%, while financials (13.8%), communication services (12.8%), and materials (7.1%) make up the next-largest sector exposures. Notable positions include Taiwan Semiconductor (6.4%), Tencent (5.7%), Alibaba (5.3%), and Samsung (5.2%).

The ETF comes with an expense ratio of 0.32%.