This ETF Might Benefit From Active Management

PIE is fairly concentrated with a 33% allocation to Indonesia, 19% to China, 12% to Malaysia and 12% to Brazil. There are also six more countries with much smaller weights. I don't think the fund takes on too much single-stock risk; the largest company, Timah, an Indonesian mining and engineering conglomerate, has a 5.8% weight.

One thing that stands out is that the P/E ratio of these holdings averages out to 18.84, which, although cheaper than EEM's average P/E of 21.58, is high by historical standards. It used to be that investors in emerging market stocks were compensated for the extra risk with P/E ratios that were generally lower than in U.S. stocks. The fact that this is no longer true is an argument for not taking on too much emerging markets exposure.

If you compare the fund's current holdings to its holdings from Sept. 30, which are available on PowerShares' Web site, you can see that the its geographical weightings have changed dramatically. At the end of the third quarter, it allocated 30% to China, compared with 19% now; 14% to Korea (which has a zero weight now); and 11% to Peru, which is currently weighted at 1.34%.

This illustrates an important point: Emerging markets are very dynamic. A fund that ranks stocks according to their relative strength in such a volatile asset class is going to change its holdings frequently -- at least it should be expected to. There is nothing wrong with that, but it begs a question -- should PIE be allowed to rebalance more than four times year? Three months strikes me as a long time to have to wait to bail out of a country if the investment criteria is relative strength, as opposed to a market cap weighting or fundamental weighting.