Assessing Emerging Market ETFs

In the past 12 months, a lot has happened in emerging market ETFs. From launches to interesting pockets of performance, emerging markets have offered something for everyone.

For starters, the segment has welcomed 29 new ETF launches—more than a 10% jump in the number of products now available to investors looking to access the region.

From factor approaches in newcomers such as the John Hancock Multifactor Emerging Markets ETF (JHEM) and the Fidelity Targeted Emerging Markets Factor ETF (FDEM), to China sector-specific MSCI-linked portfolios from Global X, to the debt-focused Invesco Emerging Markets Debt Defensive ETF (IEMD), the list of new tickers is as diverse as the portfolios behind them.

The segment is also serving up notable performance, especially in more focused strategies. To many, the “easy button” investment of choice when it comes to emerging markets is broad, super liquid portfolios such as the $65 billion Vanguard FTSE Emerging Markets ETF (VWO) and the $61 billion iShares Core MSCI Emerging Markets ETF (IEMG).

These funds are big, liquid, cheap and offer broad portfolios with thousands of securities each. Year-to-date, these hugely popular ETFs have ranked relatively low in total gains in a universe of 220-plus ETFs, delivering approximately 14% in the period.

That performance ranking includes leverage and inverse strategies, which tilts top gainers toward leveraged 2x and 3x bets. Still, broad strategies haven’t done as well some more focused strategies. Consider that the country-diverse Emerging Markets Internet & Ecommerce ETF (EMQQ)—a broad strategy focused on the technology sector—has delivered more than 31% in gains this year.

China ETFs Leading The Way

The best example of outsized gains relative to the giants is that more than a dozen China-focused ETFs have led performance charts this year, delivering more than twice the returns of IEMG and VWO. Buoyed by persistent hope that the multimonth U.S.-China trade war is coming to a resolution, Chinese equities have soared, making China the best-performing emerging market this year.

Coming into this week, all eyes were on the U.S.-China talks expected to take place in Washington, D.C.. that could lead to a trade deal by Friday. 

The Global X MSCI China Consumer Staples ETF (CHIS) is up 36.5%; the Global X MSCI China Information Technology ETF (CHIK) is up 34%; the KraneShares CICC China Leaders 100 Index ETF (KFYP) is up 33.4%. The list goes on.

It’s now unclear whether a deal will actually materialize following this weekend’s new U.S. threats of more tariffs over Chinese goods resulting from the administration’s mounting frustration at the pace of negotiations.

To some, a no-deal will inevitably lead to a correction in Chinese equity—and the ETFs that own them. But some also argue that any consolidation may be a buying opportunity given that China’s economic growth is said to be picking up pace.

Ongoing India Elections Could Trigger Rally

Another pocket of interesting action these days is India ETFs. One of the largest emerging markets—the “I” in “BRICs,” India—is in the middle of countrywide elections in a process that goes through May 19.

Characterized as the “biggest democratic exercise anywhere on the planet; also the most expensive one, estimated to cost $7 billion” by Gaurav Sinha, asset allocation strategist at WisdomTree, these elections have put India ETFs at center stage.

According to Sinha, incumbent Prime Minister Modi is likely to stay in power, and a win could push Indian equities sharply higher. Funds like the iShares India 50 ETF (INDY), the iShares MSCI India ETF (INDA) and the WisdomTree India Earnings Fund (EPI) are up 6-8% already this year.

BRICs Gaining

Other BRIC nations—Russia and Brazil—are also in positive territory. It seems that in 2019, buying up BRICs is working well for investors.

A recent Barron’s article pointed out that Russia’s gross domestic product growth has been sluggish, but corporate profits are strong, particularly in financials and consumer-focused names, and funds like the VanEck Vectors Russia ETF (RSX) and the iShares MSCI Russia ETF (ERUS), each up about 15% year-to-date, could see further gains.

In Brazil, a newly minted pro-business administration has fueled hopes of much needed reforms, and more market-friendly policies. The iShares MSCI Brazil Capped ETF (EWZ) is up 7.6% this year.

These various country-specific stories have helped BRIC-focused ETFs—a viable option for investors interested in the region but wanting to diversify single-country risk. The iShares MSCI BRIC ETF (BKF) and the Invesco BRIC ETF (EEB), for example, have outperformed broader funds such as IEMG this year:

Fixed Income Offering Opportunities

On the bond side, local-denominated bond ETFs may be about to jump as U.S. dollar strength moderates. Yes, the dollar is strong now and has been on an uptrend in the past year, but can the greenback sustain this upward momentum?

As fixed income expert J.R. Rieger, of The Rieger Report, suggests, probably not. In the face of high global political risk from the eurozone to China to Venezuela, it’s “better for the U.S. economy to have a declining dollar—more goods and services purchased by international consumers.”

Also helping local bond EM ETFs is compressed dollar-denominated yields relative to local bond yield curves that have steepened, offering investors additional yield in local currency debt relative to dollar-denominated bonds.

Consider that the iShares J.P. Morgan EM Local Currency Bond ETF (LEMB) has a current SEC yield of 6.93% while the dollar-linked counterpart iShares JP Morgan USD Emerging Markets Bond ETF (EMB) is shelling out SEC yield of 5.1%.

“There’s not too much more upside to EMB, but there is high currency risk in a weaker USD, as compared to LEMB with bond price upside and the benefit if USD weakens,” Rieger said.

Charts courtesy of Stockcharts.com

In the end, there’s no right or wrong play in emerging market ETFs. As always, it depends on what you are looking to achieve. Whether it’s to capture rapid growth, chase the consumer promise of the region, pick up some yield, or simply diversify your overall asset allocation, the market has plenty of choices for you.

Contact Cinthia Murphy at [email protected]