Active EM ETF Offers Access to a Time-Tested Strategy

With U.S. trade policy uncertainty putting investors on edge this year, many investors have started to look beyond the U.S. Despite domestic equities dominating global markets for the past several years, momentum has started to unwind. For example, “Magnificent Seven” companies have experienced significant losses in recent months.

In the current backdrop and in the wake of years of underperformance, foreign markets seem to be regaining their appeal as a possible source of higher returns and diversification going forward. Emerging markets, specifically, may hold even more attraction due to their high growth potential. However, those markets tend to be volatile, with unique risks. Investors venturing into such waters should not do so without the assistance of experts.

Fortunately, the investment environment has undergone some developments in recent years that have greatly expanded the opportunity set for investors looking to delve into emerging markets. Since 2019 and the establishment of the ETF Rule allowing custom baskets for actively managed exchange-traded funds (ETFs), traditional active managers, armed with decades of expertise, have flocked to ETFs, including some of the world’s most respected and well-known asset managers. That’s been a game changer for advisors and investors, opening up the ETF space to a new wave of end users.

Not only do previously passive ETF investors have a range of options to choose from that encompass the benefits of an ETF and active management, active mutual fund investors can access similar strategies in a wrapper that offers more advantages in the areas of tax consequences and liquidity. It is not surprising that actively managed ETFs are rapidly gaining market share versus their passively managed counterparts.

A History of Excellence in Emerging Markets

In September 2024, Macquarie Asset Management added its first emerging markets ETF with the launch of the Macquarie Focused Emerging Markets Equity ETF (EMEQ). The managers and analysts behind this new ETF have been investing in this space successfully for decades. The four-person team — led by Liu-Er Chen, who has 29 years of experience — has worked together for more than a decade.

EMEQ uses the same time-tested investment philosophy as the firm’s $5.2 billion Macquarie Emerging Markets Fund (DEMIX), an active mutual fund that Chen has managed for almost 20 years. It’s also one of the largest mutual funds covering emerging markets and has an overall rating of four stars from Morningstar against 714 funds for the three-year period ending March 31, 2025 based on risk-adjusted returns, which classifies both funds as diversified emerging markets.

EMEQ is a distillation of the top ideas within the portfolio of its mutual fund counterpart, which is Macquarie’s flagship emerging markets equity offering. Alexis Freyeisen, client portfolio manager for Emerging Markets, describes them as “having broadly the same exposures,” with a portfolio overlap between 70% and 80%.

“We have brought the same expertise and discipline, as well as our long-term investment philosophy,” he added.

This discipline is reflected in strong performance: As of March 31, 2025, the mutual fund has outperformed its benchmark year to date and over the three-, five-, and 10-year periods, returning 3.39%, 2.34%, 9.10%, and 5.84%, respectively, compared with 2.93%, 1.44%, 7.94%, and 3.71% for the MSCI Emerging Markets Index (net)

(The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Performance data for all share classes current to the most recent month end may be obtained by calling 800 523-1918 or visiting macquarie.com/mam/performance.)

“The team has a robust process and compelling track record, so we are excited about adding another vehicle for investors to access the team,” said Anthony Caruso, MAM's head of ETF Strategy. He further notes that this actively managed ETF is competitively priced within the Morningstar Diversified Emerging Markets Category with a 0.85% expense ratio.

A Compelling Asset Class

While the near-term outlook remains clouded by a host of issues, including trade policies and geopolitical tensions, the team does not believe these have derailed long-term growth opportunities underpinned by secular trends in emerging markets.

Taking the long view, emerging markets, by their very nature, are poised for growth. Their demographics in general — not always — feature younger populations and higher birth rates, which translate into a sustainable and growing workforce. Meanwhile, they are becoming increasingly urbanized, with citizens moving to cities at growing rates, boosting productivity

There are signs that the spectacular rise of the U.S. markets may be sputtering. Increased U.S. trade policy uncertainty and rich valuations combined with concerns around decelerating macro data and stubborn inflation have led many market experts to expect lower returns from U.S. equities for the foreseeable future.

Another tailwind for foreign stocks has been the weak performance of the U.S. dollar recently after an impressive run during the last several years. With likely continued volatility, investments offering less- correlated returns have become more attractive, and U.S. investors may want to consider their degree of home-country bias, something emerging markets equity exposure could mitigate.

The argument for active management in the emerging markets space is strong. Unlike the U.S., where information regarding its large-cap stocks is widely disseminated and there are few truly “hidden” opportunities to seize upon, companies in emerging markets are not as well-covered by analysts, and information may not be as transparently available. The inefficiencies that are characteristic of emerging markets present opportunities for perceptive fund managers.

Moreover, there is a significant amount of dispersion in these markets each year — they are far from a monolith. For instance, in 2024, there was a performance gap of roughly 60 percentage points between the best (Taiwan) and worst (Brazil) performers, according to Freyeisen. There are 24 countries classified as emerging, and the differences among them are myriad.

A broad-based, passive fund would invest across this universe, regardless of the prospects of the company or the country where it is domiciled. Active managers, however, can eliminate unfavorable sectors or stocks or even entire markets from consideration to focus on rising stars.

A Focus on Individual Holdings

EMEQ is truly a stock picker’s fund, relying on a fundamentally driven bottom-up approach to uncover great companies at attractive valuations and make high-conviction long-term investments.

"EMEQ has the same team and philosophy as the mutual fund. It is a more focused portfolio of our highest-conviction ideas," said Caruso. He notes that Macquarie saw an opportunity given all the broad-based passively managed and systematic emerging markets equity ETFs populating the market to bring out a more concentrated, fundamental active ETF via its "Focused" line of funds.

EMEQ’s team relies primarily on its analysts’ research and, in keeping with the bottom-up approach, focuses on fundamental analysis of individual securities rather than any particular sector or market.

“We invest in companies, not countries,” said Freyeisen.

The team looks for companies with reasonable valuations that have a moat and exhibit franchise durability while exploiting long-term trends. Freyeisen states that the objective is to hold the stocks for the long term — years, not months or days.

“One of the tenets of franchise durability is balance sheet resiliency that provides the ability to weather cyclical downturns. We aim for a very long-term horizon, keeping our eyes on the ball and not getting too distracted by macro data,” he added, commenting that macro data for emerging markets can be noisy.

That management process has resulted in a portfolio that, relative to its benchmark, is underweight financials. However, it also has a fairly heavy weight toward technology, its largest sector, and particularly semiconductors, a space that in emerging markets exhibits much more attractive valuations, compared with developed market peers. Unsurprisingly, Taiwan Semiconductor Manufacturing (TSMC) is EMEQ’s largest holding, with a weight of roughly 13%, almost twice the weight of the second-largest holding, SK Hynix.

Freyeisen notes that both of those companies have strong moats. TSMC, for example, is a leader when it comes to manufacturing semiconductors. Its moat has only gotten bigger over the years — the barriers of entry are high, as it takes several years to build an advanced chip foundry.

While on the one hand the team has high exposure to semiconductors, it has been cautious regarding China, which is currently a large underweight. But as Freyeisen describes it, “We are just very selective in China. here are a lot of names you don’t want to own. Our exposure is concentrated in the technology, media, and telecommunications sectors. The team also takes a more cautious approach with respect to India, but that is due to companies’ fundamentals and valuations, the latter being comparatively rich.”

A Fund Designed for Advisor Need

Advisors are generally underallocated to emerging markets equities, likely because returns have been uninspiring in recent years, says Freyeisen. However, he also points out that it’s an asset class with long-term structural tailwinds that is rich with tactical opportunities.

With EMEQ, Macquarie Asset Management has brought to market an actively managed ETF that is backed by a management team with decades of experience implementing a time-tested investment approach in a category that generally sees active managers add value for investors. Further, it has done so with an ETF wrapper that offers the transparency, tax efficiency, and liquidity that mutual funds cannot provide.

Given that a major shift appears to be brewing in global markets, advisors may want to consider a product like EMEQ that takes a fundamental, value-oriented, and research-driven approach to a high-growth asset class that can increase the diversification of a portfolio.

Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

The Macquarie ETF Trust Funds are distributed by Foreside Financial Services, LLC. Foreside Financial Services, LLC is not affiliated with any Macquarie entity, including Macquarie Asset Management and Delaware Distributors, L.P.

Carefully consider the Fund's investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Fund's prospectus or the summary prospectus, which may be obtained by visiting the Macquarie ETF Trust resource pages or calling 844 469-9911. Read the prospectus carefully before investing.

Expense ratios are as of the Fund's prospectus available at the time of publication.

Net expense ratio reflects contractual waivers of certain fees and/or expense reimbursements from April 1, 2025 through March 31, 2026.

Diversification neither ensures a profit nor guarantees against loss in a declining market.

Foreign and emerging markets risk is the risk that international investing (particularly in emerging markets) may be adversely affected by political instability; changes in currency exchange rates; inefficient markets and higher transaction costs; foreign economic conditions; the imposition of economic or trade sanctions; or inadequate or different regulatory and accounting standards. The risk associated with international investing will be greater in emerging markets than in more developed foreign markets because, among other things, emerging markets may have less stable political and economic environments. In addition, there is often substantially less publicly available information about issuers, and such information tends to be of a lesser quality. Economic markets and structures tend to be less mature and diverse, and the securities markets may also be smaller, less liquid, and subject to greater price volatility.

Diversification neither ensures a profit nor guarantees against loss in a declining market. The Fund is actively managed and may not meet its investment objective based on the Adviser’s success or failure to implement investment strategies for the Fund. The Adviser’s evaluations and assumptions regarding issuers, securities, and other factors may not successfully achieve the Fund’s investment objective given actual market conditions.

Macquarie ETF Trust exchange-traded funds (ETFs) are actively managed and do not seek to replicate a specific index. ETF shares are bought and sold through an exchange at the then-current market price, not net asset value (NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV when traded on an exchange. Brokerage commissions will reduce returns. There can be no guarantee that an active market for ETFs will develop or be maintained, or that the ETF's listing will continue or remain unchanged.

As of March 31, 2025, Macquarie Emerging Markets Fund was rated against the following numbers of Diversified Emerging Markets funds over the following time periods: 714 funds in the last three years, 636 funds in the last five years, and 435 funds in the last 10 years. The calculation is based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance. Past performance is no guarantee of future results.

Institutional Class shares rated 3, 3, and 4 stars for the three-, five-, and 10-year periods ended March 31, 2025 among 714, 636, and 435 Diversified Emerging Mkts funds, respectively. There are 714 funds in the overall rating.

The Morningstar RatingTM for funds, or "star rating," is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

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Star ratings are relative to a peer group and do not necessarily mean the fund had high or positive total returns. Morningstar updates its star ratings monthly. Past performance does not guarantee future results.

The MSCI Emerging Markets Index represents large- and midcap stocks across emerging market countries worldwide. The index covers approximately 85% of the free float-adjusted market capitalization in each country.

The Morningstar Diversified Emerging Markets Category compares funds that tend to divide their assets among 20 or more nations, but tend to focus on the emerging markets of Asia and Latin America rather than on those of the Middle East, Africa, or Europe. These funds invest predominantly in emerging market equities, though some invest in equities as well as fixed income investments from emerging markets.

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