Matthews Emerging Markets Discovery Active ETF (MEMS)

The Matthews Emerging Markets Discovery Active ETF is a fund for investors who want exposure to smaller, less famous companies in emerging markets — businesses trading on stock exchanges in China, India, Vietnam, Brazil, and dozens of other countries that larger funds often overlook.

Most big emerging-markets index funds hold only the largest companies in each country: the industrial giants, the big banks, the major tech firms. But that leaves huge numbers of smaller, faster-growing businesses off the radar. MEMS is designed to hunt for these overlooked firms, the idea being that a skilled manager can find 10-baggers — companies that rise tenfold or more — before they become household names.

How MEMS works and what it invests in

The fund holds maybe 50 to 80 companies across emerging markets, picked by Matthews International Capital Management, a firm that has specialized in emerging-market investing for decades. The companies are typically mid-cap or smaller — the kinds of businesses you probably have never heard of, in industries from manufacturing to healthcare to consumer goods. The managers visit these companies, meet the management teams, and try to spot the ones with the best products, the strongest competitive positions, and the best growth prospects.

Because the fund is concentrated in relatively fewer companies than a broad emerging-markets index fund, individual picks matter more. If the fund owns a Vietnamese bank that doubles, that move helps your returns a lot. If it owns one that collapses, that hurts a lot too.

Why small emerging-markets companies matter during cycles

Emerging markets go through boom-and-bust cycles. When capital flows into emerging economies and people are optimistic, money rushes into the stock markets of countries like India, Vietnam, and Mexico. But when global sentiment turns pessimistic — during a U.S. recession, a spike in interest rates, a debt crisis — money flees those markets just as fast. Your fund value can swing wildly.

Small companies are more volatile than large ones in all markets, and emerging-markets small companies doubly so. But that volatility also means bigger opportunity: when a small emerging-markets company grows from 50 million dollars in revenue to 500 million, its stock can multiply many times over. Large companies rarely grow that fast. MEMS is betting that the managers can pick the small companies that will have that kind of trajectory.

The research advantage

Matthews has teams on the ground in emerging-market countries. The fund managers and analysts visit factories, meet founders, attend industry conferences, and build relationships with management teams. This on-the-ground work is what active management of small emerging-markets companies is supposed to be about. If MEMS’s managers can spot quality management and solid business fundamentals before the market catches on, they can outperform simply by being smarter about which small companies to buy.

But this approach is also dependent on people. The skill of the fund’s managers is central to whether the fund does well or not.

Costs and liquidity

MEMS is more expensive than a broad emerging-markets index ETF because active management requires research staff and overseas operations. The expense ratio shows this. You are paying for the managers’ expertise and their on-the-ground presence.

The liquidity depends on the stocks the fund holds. If MEMS owns a Vietnamese bank with limited trading volume, it can take time to sell a large position without moving the price. The fund itself trades on exchanges during market hours, but the underlying companies may not be very liquid, which means the fund’s liquidity can be spotty during stress periods.

Risks and pitfalls

Small emerging-markets companies face risks that larger companies do not. Political instability, changes in government policy, currency collapses, and sudden shifts in regulations can wipe out a business overnight. The fund’s companies have less cash on hand to survive downturns, and less ability to compete with much larger rivals if the market turns tough.

Currency risk is also real: most of these companies price their shares in their local currencies, so when those currencies weaken, your returns suffer even if the stock price in the local currency goes up.

The biggest risk is that the fund’s managers simply make bad picks. Picking small, underfollowed stocks is genuinely hard. If MEMS’s managers miss on their bets or pick companies that look good on paper but have hidden problems, shareholders will suffer.

Who MEMS suits and how to evaluate it

MEMS is for investors who have years to invest (at least five to ten), who can tolerate large swings in portfolio value, and who believe that skilled managers can find growth opportunities in emerging markets that the index misses. It is not for investors who need their money soon or who need a stable portfolio.

To evaluate MEMS, look at the fund’s long-term performance relative to a broader emerging-markets index. One or two years means nothing; three to five years starts to tell you whether the managers are picking good companies. Also look at the biggest holdings and try to understand the business stories: Are these companies you would want to own? Do they have genuine competitive advantages? Are they trading at reasonable valuations relative to their growth prospects?

Read the fund prospectus and fact sheet to understand the fee structure and the managers’ investment philosophy. Try to understand whether the success comes from smart stock-picking or just from being lucky when emerging markets rallied broadly.

Also watch how the fund performs relative to emerging markets during downturns. If it falls 50 percent when the emerging-markets index falls 30 percent, that is a sign that the smaller, less liquid holdings are a disadvantage. That is normal for a small-cap emerging-markets fund, but it is important to know what you are buying.