Emerging markets are a rich hunting ground for active managers, but volatility is embedded in the asset class. A peer-relative quant process can balance selectivity with diversified ETF participation.
Emerging markets (EMs) are often described as a rich hunting ground for active managers, and with good reason. No longer are they simply a collection of faster-growing economies on the periphery of global portfolios; rather, they are increasingly embedded in the physical infrastructure of the next global cycle – AI hardware, memory, power equipment, electrification, advanced manufacturing, critical resources and fast-evolving domestic consumption.
But EMs remain a volatile asset class. How, then, can investors capture winners and avoid laggards without giving up the diversified exposure that makes the asset class worth owning? We believe they need not choose. EMs are not simply becoming more attractive – they are becoming more selective by necessity. This is precisely the environment the CT QR Series Emerging Markets Equity Active ETF is designed for: active stock selection without abandoning diversified EM exposure.
From the 4Ds to the 5Cs
Four structural forces that were long discussed as driving global markets are now transforming while becoming more applicable to EMs.
Compute > digitalisation. The story is no longer just more people using technology; it is the physical build-out behind AI – semiconductors, high-bandwidth memory, data centres, networking, cooling and power. This is why Taiwan and South Korea matter so much within EMs and why recent index returns have been so heavily shaped by a handful of semiconductor names.
Capacity > decarbonisation. The energy transition remains vital, but the more immediate constraint is whether economies have enough electricity, grid resilience, storage and industrial capacity to support AI, electrification and manufacturing. The future is not just greener; it is more power-hungry. But selectivity remains key – not every company exposed to this cycle benefits equally.
Control > deglobalisation. The world is not becoming less global so much as more strategic – governments and companies want greater control over critical technologies, supply chains, resources and production. As suppliers of strategic resources, manufacturing hubs or hardware leaders, many EMs sit directly inside this shift. But the opportunity for investors is not simply identifying supply-chain beneficiaries, rather it is distinguishing between durable competitive businesses and those that face substitution, political risk or overinvestment.
Consumption > demographics. Simple population growth is too blunt a lens. The sharper question is which companies can successfully convert changing household incomes, digital spending, financial inclusion and healthcare demand into sustainable shareholder returns.
Conviction – the resultant investment implication. The first four Cs create genuine opportunity, but they also create dispersion: structural winners that sit alongside businesses that are disrupted, over-owned or simply less attractive than their peers. That is why selectivity belongs at the centre of any modern EMs discussion.
Beyond headline returns
Concentration is the risk; dispersion is the opportunity
Concentration is usually framed as a risk – and it is. But a more important observation is that in EMs concentration and dispersion are rising together. As a small number of companies exert a growing influence on returns, performance differences across the broader universe keep widening. That is a very different environment from a simple beta recovery, in which broad market exposure does most of the work. When leadership is narrow and outcomes are highly dispersed, the cost of owning the wrong businesses climbs.
Crucially, this is not an argument for abandoning the largest names. Selectivity is not about being underweight the giants for its own sake – several of them remain genuine structural winners. It is about holding each company on the evidence rather than simply because of its index weight – do these giants continue to justify their valuation, earnings expectations and competitive position relative to their peers? While a market-cap index tells you which companies have become large, it does not tell you which are most attractive from here. The task is to distinguish between the two – among the mega-caps and across the rest of the universe.
Similarly, country labels are now too blunt. A Taiwanese chipmaker should be judged against relevant technology-hardware peers, not a Brazilian bank; a Korean memory producer should be judged against businesses facing comparable margin and demand cycles.
A systematic, peer-relative framework compares companies against those they actually compete with, while country-specific risks are captured through a country risk-premia methodology. This cleanly separates company attractiveness from market risk.
Selectivity without the wild swings
Most investors now accept that active management makes sense in EM equities – inefficiencies are greater here, and so is the potential for alpha. The catch is that, too often, active EMs investing has meant concentrated, sector- or style-heavy portfolios that deliver that alpha alongside violent swings in returns. In an already volatile asset class, it can be hard for clients to retain their conviction.
That is where the CT QR Series Emerging Markets Equity Active ETF is designed to differ.3 It screens the MSCI EM universe on three investment themes – Quality, Value and Catalyst – while staying benchmark-aware across sectors, regions and countries. This systematic, peer-relative process eliminates approximately 65% of the universe where conviction is insufficient.
The result is genuinely selective at the stock level yet broadly participatory at the market level, with that three-factor discipline helping the strategy maintain broad market participation while seeking active return through stock selection.
In other words, genuine selectivity alongside broader benchmark awareness in a liquid, efficient and transparent ETF wrapper built for today’s emerging markets.
