Emerging Market ETFs' Year-End Push

Emerging market ETFs started 2019 strong, but struggled to keep pace as the U.S.-China trade war took hold and concerns about global growth mounted. Ultimately, the segment ended the year lagging the U.S. stock market, but not without a solid final push buoyed by a recent respite in the trade dispute.  

If you are an investor in one of the biggest and broadest EM funds—the Vanguard FTSE Emerging Markets ETF (VWO), the iShares Core MSCI Emerging Markets ETF (IEMG) or the iShares MSCI Emerging Markets ETF (EEM)—you picked up between 18-20% in gains in 2019. By comparison, the SPDR S&P 500 ETF Trust (SPY) was up 30%, almost twice the returns of IEMG. But in the last month alone, these emerging market ETFs rallied upwards of 7%, giving SPY a run for its money.

Source: Chart courtesy of StockCharts.com

Tech Focus Delivers In EM

On balance, only one emerging market ETF outpaced SPY in 2019, and it’s a fund that has often stood out in this segment due to its heavy tech focus—the Emerging Markets Internet & Ecommerce ETF (EMQQ).

EMQQ invests exclusively in internet and e-commerce companies in emerging markets—a segment that continues to grow globally. Consider that in the U.S., technology was by far the runaway S&P 500 sector last year, delivering gains of almost 50% (using the Technology Select Sector SPDR Fund (XLK) as a proxy).

A technology focus in emerging markets also seems to have worked. In EMQQ, companies must have most of their revenue come from segments such as internet services, e-commerce retail, online advertising, and social networks.

About 75% of the mix is tied to internet stocks, and 50% of the portfolio is allocated to China, with names like Alibaba (BABA), Tencent (TCEHY) and Baidu (BIDU) among top holdings. (You can see what other ETFs hold these stocks in our ETF Stock Finder.)

It’s unsurprising that EMQQ, too, struggled during the escalation of the U.S.-China trade war. But it’s been picking up pace in recent weeks following an agreement between the two countries in December—President Trump said a “signing ceremony” of the deal would take place in early January.

By the end of 2019, EMQQ recorded gains of almost 34%, hitting highs not seen since the summer of 2018.

Source: Chart courtesy of StockCharts.com

On EMQQ’s Heels

A look at the best-performing emerging market ETFs last year shows that EMQQ—the leader—was followed by another tech-focused ETF, the KraneShares Emerging Markets Consumer Technology Index ETF (KEMQ).

KEMQ also invests in emerging market companies linked to internet services and e-commerce but in a basket that relies on a committee to pick stocks. The portfolio, which is about 30% allocated to China and is more concentrated than EMQQ with only 50 holdings (EMQQ has 68 names), weights securities in tiers.

Beyond technology, a look at the best performing EM ETFs, excluding geared funds, shows that other pockets of standout performance in 2019 included funds that focused on the larger BRIC economies (Brazil, Russia, India, China) as well a fund tapping into the momentum factor. These top-performing funds led the pack of emerging market ETF performance, but with the exception of EMQQ, were all laggards to U.S. stocks. The list is below:

Source: Bloomberg; data as of 12/31/2019

What’s In Store For EM in 2020

Going forward, some say emerging markets could be poised for upward momentum, especially if nothing derails U.S.-China trade relations next year and no recession hits the developed world.

Among these supportive views is Franklin Templeton. In his 2020 outlook for the region, Franklin Templeton’s Emerging Market Equity Chief Investment Officer Manraj Sekhon said that emerging market growth should pick up pace for the year, “more than double” developed market expansion.

Supporting that growth into 2020, he said, is “conducive monetary policies” at the hand of more dovish central banks, as well as softening inflation and ongoing structural reforms as these economies become more diversified, “less reliant on low-cost manufacturing and commodities.”

Will volatility abound? No doubt, according to Sekhon. But ETF investors need to keep their eyes on the long-term horizon.

“Much noise and conflicting signals dominated 2019, which led many investors to limit their risk appetite and discount the long-term growth drivers in emerging markets,” he said. “While some of these uncertainties may persist in the near term, we believe it is essential to stay the course.”

Contact Cinthia Murphy at [email protected]