Emerging markets are back in vogue. ETFs targeting the segment are up significantly more than their developed-market counterparts this year after underperforming the past four years.
The two largest emerging market ETFs—the iShares MSCI Emerging Markets ETF (EEM) and the iShares Core MSCI Emerging Markets ETF (IEMG), both with around $30 billion in assets—are up just shy of 17% on a year-to-date basis, easily outpacing the 7.8% gain for the SPDR S&P 500 ETF (SPY).
That's a surprising result for a year in which many analysts had predicted continued underperformance in emerging markets due to Trump's trade policies and a rising U.S. dollar. The president's policies haven't proven to be as detrimental to trade as initially feared, and the greenback is actually down 2.5% on the year, providing some relief for battered emerging market equities.
Better Than US Stocks
A stabilization in commodity markets, which are a key income source for many emerging markets, also aided the group. This improved backdrop may mean that corporate earnings for emerging markets accelerate by 26% in 2017, according to Geoffrey Dennis, head of Global Emerging Market Strategy at UBS Investment Bank. That compares to an expected 10% growth rate for U.S. corporations.
Even after the rally, widely followed investor Jeffrey Gundlach said that emerging market stocks are still a better buy than U.S. stocks, so much so that he would recommend going short SPY, while going long EEM.
"The valuation of emerging markets is half the valuation of the S&P 500 when you look at things like price-to-sales, price-to-book and Dr. Shiller's CAPE ratio," Gundlach told CNBC on the sidelines of the Sohn Conference.
Riding The Trend
The long-EEM/short-SPY pair trade is one way to express a bullish view on emerging markets. Another way—and the most common—is simply to buy one of the broad emerging market ETF like EEM, IEMG or the Vanguard FTSE Emerging Markets ETF (VWO) and call it a day.
But for investors who want to make an even more aggressive bet on the rising emerging market trend, there are more focused ETFs available that have the potential for greater gains (and greater losses).
Nine of the 10 best-performing emerging market ETFs so far this year target a single country. The only exception is the Emerging Markets Internet & Ecommerce ETF (EMQQ), up 37.4%. EMQQ holds stocks of more than 40 internet-related companies operating in almost 20 different countries.
The other top-performing EM funds hone in on one of four countries.