Lazard Emerging Markets Opportunities ETF (EMKT)

The Lazard Emerging Markets Opportunities ETF (ticker EMKT) represents an unusual bet in the world of ETFs: it is actively managed rather than passively indexed, meaning a team of stock pickers at Lazard Asset Management selects individual emerging-market companies rather than simply holding the entire index.

Origins and the case for active management

Lazard Asset Management, the investment-management arm of Lazard Ltd., has managed emerging-market portfolios for decades. The firm built a reputation for disciplined, fundamental stock selection — researching individual companies, understanding their competitive positions, and investing in those with the clearest paths to growth at a reasonable price.

EMKT launched as a way to offer that research capability in ETF form. Historically, most emerging-market exposure came through passive index funds that held a broad basket of EM stocks. The case for active management in emerging markets is different than in developed markets: EM indices are heavily concentrated in a small number of very large companies, often banks or state-owned enterprises; the research barriers are higher because many EM companies report less transparently than US or European peers; and the range of quality among securities is wider — some EM companies are world-class, others are barely solvent.

Lazard’s argument is that active selection can find the good ones and avoid the bad ones, and that the resulting portfolio can outperform a passive index by enough to justify the higher fees that come with active management.

How EMKT differs from a passive EM fund

A passive emerging-market fund like an MSCI Emerging Markets Index tracker holds the largest EM companies in proportion to their market capitalization. China, India, and Taiwan dominate such indices, as do a few very large banks and oil companies. The fund holds them all; if a company makes up 5 percent of the market cap, it makes up roughly 5 percent of the fund.

EMKT does not work that way. Lazard’s managers decide what weight to give each country and sector, and then pick individual stocks within those bets. If the team thinks India will outperform, they overweight Indian stocks. If they think a particular semiconductor company is better than its index weight suggests, they buy more of it. If they think a state-owned bank is overvalued, they buy less or avoid it altogether.

This active approach means EMKT can look quite different from a passive EM index at any given time. It also means the fund’s performance depends entirely on whether the stock-picking team is right — whether their bets are well-researched and well-timed, or whether they are simply guessing.

The active-management fee penalty

Active management costs more than passive indexing. EMKT’s expense ratio is typically higher than a fund that simply tracks the MSCI Emerging Markets Index. That higher fee is a drag on returns that must be overcome by superior stock selection. The math is simple: if EMKT holds an expensive position that loses money, or if it avoids a cheap position that gains money, the active fee becomes a costly mistake.

Over long periods, most active emerging-market fund managers underperform passive indices. The consensus in academic finance is that beating an index consistently over many years is difficult, and that the fees required to pay for the research and trading often exceed the value added by good stock picking. EMKT is betting against that consensus — that Lazard’s research is good enough to add value despite the fees.

Ownership and structure

EMKT is an ETF, which means shares trade on an exchange and can be bought or sold intraday like stocks. But the fund itself is actively managed — Lazard’s team makes decisions about the portfolio, not a computer algorithm. The ETF structure gives the fund the liquidity and tax efficiency that come with the ETF wrapper, while the active management gives investors access to Lazard’s stock-picking capabilities without having to buy one of Lazard’s mutual funds, which can impose higher minimum investments and redemption restrictions.

This hybrid structure has become more common in recent years, as active managers have moved into the ETF world partly to adapt to investor preference for ETF fees and accessibility, and partly to stem the flow of assets away from traditional active mutual funds.

Performance, persistence, and risk

EMKT’s returns depend on how well Lazard’s emerging-market stock picks work out. In some years, the active bets will outperform a passive index. In others, they will lag. That is the nature of active management — higher upside potential, but also higher downside, and periods where the fees are a pure drag on returns.

An investor buying EMKT is making two bets: one, that emerging markets will appreciate in value (which could be wrong), and two, that Lazard’s managers will pick better EM companies than a passive index would hold (which is also uncertain). The second bet is the active-management wager — it cannot be hedged, and it is purely a matter of belief in Lazard’s research and skill.

Researching EMKT

Before investing in EMKT, examine the fund’s historical returns versus a passive EM index over as long a period as data allows — preferably at least 10 years. Have the active bets delivered value net of fees, or have they lagged? Look at the portfolio holdings and the reasons Lazard gives for overweighting or underweighting countries and sectors. Read Lazard’s investment insights to understand the team’s philosophy and their current conviction bets.

Also consider the tax implications: because EMKT is actively managed, there is more turnover, which can generate capital gains distributions that passive funds avoid. For a taxable investor, that is a real cost.

Finally, remember that past performance is not a guarantee of future results, and that the case for active management — in emerging markets or anywhere — has grown weaker as passive indexing has improved and fees have fallen. EMKT is for investors who believe in Lazard’s emerging-market stock-picking capability and who are willing to accept higher fees in exchange for the chance of outperformance.