Outperforming ETFs in Emerging Markets' Bright Spots

With inflation running rampant, interest rates cranking steadily higher, markets in turmoil and two quarters of GDP contraction, the U.S. is not looking like the best investment opportunity for many investors. And most other developed markets have done even worse in the past 12 months.  

While emerging and frontier markets’ performance have been uneven, there are some bright spots over the past year that merit tactical investors’ attention.  

The emerging market equities have been seen as a source of diversification, though they have generally trailed the U.S., with the exception of China. But China is being hit hard by its stringent domestic coronavirus policies, which have brought some industries to a standstill. With the country representing about 30% or more of cap-weighted emerging market indexes, it’s not a stretch to say China is a drag on emerging markets lately.  

We’ve compiled a selection of ETFs that have outperformed the U.S. market over the past year as well as year to date. 

Oil Boosts Middle East 

With Russian oil banned from many markets due to sanctions over Moscow’s war in Ukraine, other oil-producing countries have reaped the benefits of constrained supply. The iShares MSCI Saudi Arabia ETF (KSA), iShares MSCI Qatar ETF (QAT) and iShares MSCI UAE ETF (UAE) have all outperformed the SPDR S&P 500 ETF Trust (SPY) by a wide margin during the past 12 months, no doubt boosted by their oil sales.  

On a 12-month and year-to-date basis as of July 27, the three Middle Eastern country funds blew past the U.S. market. While SPY fell 6.3% during the 12-month period, KSA, QAT and UAE posted returns ranging between 12% and nearly 23%. Over the year-to-date period, SPY declined 14%, even as the three non-U.S. ETFs gained between 3% and 12%. During both time periods, QAT was the best performer among the Middle Eastern ETFs. 

The question is whether the outperformance will continue given recent moderation in oil prices. 

*Annualized

Standouts in Asia 

Although China has been hit hard during the pandemic, other emerging markets in the Asia Pacific region are exhibiting strong performance relative to the U.S. 

The iShares MSCI Indonesia ETF (EIDO) has shown a particularly strong performance, with a 12-month return of 17.24% and a year-to-date return of 1.72% compared with SPY’s performance of -6.3% and -14.01%, respectively.  

The iShares MSCI India ETF (INDA) and the iShares MSCI Malaysia ETF (EWM) both trailed Indonesia during the 12-month and year-to-date periods, but still outperformed SPY. INDA was up 0.57% during the 12-month period, while EWM was down 4.58%. Both were down more than 8% over the year-to-date period.  

*Annualized

Latin America’s Standouts 

Latin America is another region that has seen strong performance from select countries relative to the U.S.  

The iShares MSCI Chile ETF (ECH) has been a particular standout, notching a year-to-date return of 17.12% and a 5.48% return for the one-year period. 

The rest of the funds considered have been down for the year-to-date and one-year periods but have still done better than the U.S. The iShares MSCI Mexico ETF (EWW) and the Global X MSCI Colombia ETF (GXG) were down 6.42% and 11.05%, respectively, while SPY was down 14% for the year-to-date period. 

Over the one-year period, when SPY was down 6.3%, EWW declined 2.61%, while GXG fell 5.38%. 

*Annualized

Sources: Bloomberg & FactSet; data as of 7/27/2022 

Emerging markets have been traditionally touted as ways to diversify investors’ portfolios, but looking at the space in aggregate doesn’t offer much diversification given that China overshadows the category. A more granular, performance-driven approach could allow ETF investors to include emerging markets in their portfolio with better results.  

Contact Heather Bell at [email protected]