ETF Pulse Check Navigating Emerging Markets with MEMS

The Matthews Emerging Markets Discovery Active ETF (MEMS) is an actively managed fund targeting small- and mid-cap companies within emerging markets, with a particular emphasis on entities exhibiting sustainable growth potential. Positioned strategically to capitalize on dynamic growth opportunities, including frontier markets, MEMS allocates at least 65% of its assets to small-cap enterprises, complemented by mid-cap holdings. The fund employs rigorous fundamental analysis, emphasizing balance sheet robustness, management quality, and financial health, while integrating ESG screens to exclude controversial sectors. This approach underlines MEMS's relevance in today's market, where investors are increasingly seeking sustainable growth in emerging markets amidst evolving global dynamics.

Basic Information
The Matthews Emerging Markets Discovery Active ETF, listed under the code MEMS, is issued by Matthews International Capital Management and was launched on January 10th, 2024. With an expense ratio of 0.89%, MEMS represents a cost consideration for investors. The fund's top holdings include Bandhan Bank, Legend Biotech, and Hugel, collectively amounting to a weight of 36.98% of the portfolio. MEMS exhibits sector exposure primarily in Health Care (10.02%), Financials (9.35%), and Consumer Discretionary (6.98%). Despite the absence of significant capital flow over recent short-term periods, the ETF's average returns over six months, one year, and three years stand at 2.50%, 2.05%, and 1.51% respectively, with corresponding volatilities of 5.41%, 5.33%, and 4.19%.

News Summary
Recent news affecting the Matthews Emerging Markets Discovery Active ETF (MEMS) spans various thematic concerns. On the macroeconomic front, the US-Japan trade deal, which includes tariff reductions, may positively influence Asian market sentiment, potentially benefiting MEMS holdings like Legend Biotech and Zhihu. Additionally, geopolitical developments in Syria and increased sectarian violence pose risks of regional instability, indirectly affecting emerging market sentiment. In Argentina, soaring interest rates present a liquidity challenge for MEMS financial holdings like Bandhan Bank and Shriram Finance. Furthermore, US tariffs on global trade and commodities could impact holdings such as Radico Khaitan and CarTrade Tech by increasing operational costs. Lastly, Brazil's fiscal constraints amid spending freezes and tax disputes could influence MEMS holdings in the region, affecting investor sentiment and market dynamics.

Analyst Rating: Sell
The Matthews Emerging Markets Discovery Active ETF (MEMS) is evaluated with a cautious outlook. The high expense ratio of 0.89% detracts from potential returns, making the fund less appealing from a cost perspective. Capital flow stagnation over recent periods suggests a lack of investor interest. While MEMS demonstrates commendable return stability, its modest average returns of 2.50%, 2.05%, and 1.51% over varying periods fall short of broader market growth benchmarks. Despite a well-diversified portfolio, with top holdings accounting for only 36.98% of the total, and significant sector exposure in Healthcare at 10.02%, the overall investment case remains tenuous. Consequently, a 'Sell' rating is attributed, reflecting the need for cautious investor engagement.

Backtest Scenario
The Matthews Emerging Markets Discovery Active ETF (MEMS) showcased resilience during the financial sector volatility of the 2020 pandemic, driven by its focus on innovative, capital-efficient companies within emerging markets. A backtest of MEMS's performance during this period reveals strategic positioning in firms with competitive advantages and differentiated technologies, which helped navigate economic downturns effectively. Despite significant market volatility, MEMS achieved a return of 1.08%, outperforming the broader MSCI Emerging Markets Index. The fund's management, led by experienced portfolio managers, played a pivotal role in steering the ETF through tumultuous times, emphasizing its strategic approach to capital appreciation amidst challenging economic conditions.

Risk Outlook
The Matthews Emerging Markets Discovery Active ETF (MEMS) faces a complex risk environment influenced by macroeconomic, sectoral, and concentration factors. Positive developments like the US-Japan trade deal could enhance market sentiment for Asian holdings, yet geopolitical tensions in the Middle East and fiscal uncertainties in Brazil pose significant challenges. Sector concentration adds layers of risk, with Healthcare and Financials facing potential constraints from macroeconomic shifts such as Argentina's liquidity crunch. Moreover, US tariffs impacting global trade and commodity markets could increase operational costs for MEMS holdings reliant on these sectors. Despite current data indicating muted volatility, the evolving geopolitical landscape necessitates vigilant monitoring of trade policies and regional developments.

Conclusion
The Matthews Emerging Markets Discovery Active ETF (MEMS) presents a nuanced investment case characterized by its focus on sustainable growth in emerging markets, appealing to investors with an aggressive risk appetite. However, given the high expense ratio and modest returns, cautious monitoring of macroeconomic shifts and geopolitical developments is advisable. As the fund navigates complex global dynamics, investors should remain vigilant about potential risks and sector-specific impacts to optimize strategic engagement with MEMS.