Argument For Emerging Global’s ECON

July 18, 2013

IU's Matt Hougan explores new, cutting-edge ways to play the emerging markets.

In my monthly interview with Olly Ludwig, I called ECON the new face of emerging markets. Here's why.

Emerging markets have been hit with the ugly stick recently. The iShares Core Emerging Markets ETF (NYSEArca: IEMG), our favorite broad-based emerging markets ETF, is trading down about 9 percent year-to-date, even as the SPDR S&P 500 ETF (NYSEArca: SPY) is up nearly 19 percent.

But not all flavors of emerging markets have been hit equally. For one, different countries have been behaving differently: The iShares MSCI Philippines ETF (NYSEArca: EPHE) is up nearly 5 percent year-to-date, while the iShares MSCI All Peru Capped ETF (NYSEArca: EPU) is down nearly 30 percent.

But more interestingly, different approaches to broad-based emerging markets have been delivering different patterns of return. The two most interesting alternatives in my mind are the PowerShares FTSE RAFI Emerging Markets ETF (NYSEArca: PXH) and the EGShares Emerging Consumer ETF (NYSEArca: ECON).

Neither has been tearing it up exactly. ECON has managed to lose "just" 0.86 percent on the year, while PXH is down a whopping 12.56 percent.

IEMG_vs_ECON_vs_PXH

Going forward, though, I think there are reasonable—if opposing—arguments for both funds.

PXH: A Value Play

The argument for PXH is simple. This fundamentally weighted ETF takes the FTSE Emerging Markets Index and, instead of weighting companies by their market capitalization, weights them by fundamental measures like sales, earnings and dividend yields. The resulting portfolio strongly overweights energy stocks (22 percent versus 10 percent for IEMG) and telecoms (11 percent versus7 percent), but the real story comes in the valuation metrics. With a price-to-earnings ratio below 10, a book value near 1 and a dividend yield that's a point higher than IEMG, PXH is compelling from a pure value perspective.

Emerging Markets Valuation Comparison

IEMG

PXH

ECON

Weighted Average Market Cap

$37.11B

$48.76B

$28.98B

Price/ Earnings Ratio

12.34

9.44

22.87%

Price/ Book Ratio

1.4

1.02

3.51

Dividend Yield

2.55%

3.51%

1.59%

 

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