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Dennis Hudachek Analyst Blogs

Rethinking Emerging Markets ETFs


[Editor's note: This will be a two-part blog discussing the need to rethink "emerging markets" as a whole in a potential post-QE world. This first part will discuss the varying YTD returns of specific countries, while part two discusses attractive sector and themed ETFs, as an alternative to broad, cap-weighted ETFs.]


Things are getting ugly in the emerging markets realm, leaving many folks questioning whether the emerging markets growth story is over.

I'm not in that camp, and I don't think the emerging markets story as a whole is over. That said, rather than discussing the death of emerging markets, I think maybe it's time to simply start rethinking emerging markets.

For starters, investors have become too accustomed to lumping all emerging markets together into one category based on the cap-weighted MSCI Emerging Markets Index. The problem is that the underlying "developing" countries in the index have advanced by leaps and bounds since the end of the 20th century.

More specifically, some of these countries have become giants themselves. China, which carries a 17 percent weighting in the index, is now the world's second-largest economy, and it's a lot harder to grow an $8 trillion economy at 10 percent annually than it was when the sleeping giant first woke up.

Brazil is now the sixth-largest economy. Russia and India—rounding out the BRIC countries in addition to China—are now the eighth- and 10th-largest in the world, respectively. Meanwhile, South Korea and Taiwan—which make up a combined 27 percent in the index—are now so developed they're under review to be reclassified as developed.

Is it crazy to think that these markets—and other smaller countries in the index—that are coming off a hangover of massive inflows and hypergrowth over the past decade, are now experiencing growing pains?

Many emerging countries are now suffering from massive outflows due to the anticipated scaling back of the unprecedented monetary stimulus that the Federal Reserve unleashed after the market crashed in 2008.

Still, some countries are experiencing a set of problems that are more severe than others.

For example, India and Indonesia are dealing with crumbling currencies, inflation, capital flight, dwindling reserves and unsustainable current-account deficits. Meanwhile, Turkey is dealing with political instability on top of a few of these same issues plaguing India and Indonesia.

Meanwhile in China, the new regime is trying hard to spur domestic consumption to transition the country away from its old export-driven model to a more sustainable growth model.

The differences between the various countries, and their differing problems, are becoming clear in the recent rout. In other words, not all developing countries are being affected by the pullback to the same degree when you look at year-to-date returns.

Here's a table of total returns year-to-date, as represented by prominent ETFs following these markets.

Ticker Fund Name Total Returns YTD Local Currency YTD
EWT iShares MSCI Taiwan -4.442 -3.3996
GXC SPDR S&P China -4.5909 1.7542
EPOL iShares MSCI Poland Capped -6.4337 -2.5955
EWM iShares MSCI Malaysia -6.8744 -8.8489
EWW iShares MSCI Mexico Capped -10.7742 -2.9821
GXG Global X FTSE Colombia 20 -12.6799 -9.7227
EWY iShares MSCI South Korea Capped -13.0414 -4.8741
RSX Market Vectors Russia -13.4114 -8.6054
EPHE iShares MSCI Philippines -13.7613 -8.7306
EZA iShares MSCI South Africa -18.1904 -22.7072
THD iShares MSCI Thailand Capped -18.9464 -5.1651
EWZ iShares MSCI Brazil Capped -22.5623 -15.6171
EPU iShares MSCI All Peru -25.5242 -10.1979
INDA iShares MSCI India -26.3991 -20.3564
TUR iShares MSCI Turkey -26.7527 -14.4405
EIDO iShares MSCI Indonesia -29.2687 -15.7664
EEM iShares MSCI Emerging Markets -14.6884 Various
VWO Vanguard FTSE Emerging Markets -15.1411 Various
As of 8/27/13


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