What Lies Ahead for Emerging Market ETFs?

Per Goldman Sachs analysis, the recent selloff in the global market has lowered emerging market valuations and added to the appeal of such investments. Moreover, performance and fund flows have been attractive for investments in emerging markets (read: 3 ETFs to Benefit as Faster Rate Hike Worries Cool Down).

Per etf.com data, iShares Core MSCI Emerging Markets ETF (IEMG) witnessed $211.2 million in inflows in the week ended Mar 23. Moreover, IEMG has returned 0.8% so far this year against 1.4% decline of the SPDR S&P 500 ETF Trust (SPY).

In its most recent meeting, the Fed hiked interest rates by 25 basis points for the sixth time since it started trending up in December 2015. However, the Fed maintained its forecast for three hikes in 2018 on the back of modest inflation.

What’s in Store for EMs?

Multiple asset management firms have been considering EM investments as a potential option to gain market-beating returns. Proponents argue that these stocks offer high earnings growth and relatively cheaper valuations following the recent correction.  

Although Trump’s election victory was a negative for emerging market investment enthusiasts, owing to his protectionist stance and pro-growth domestic policies, the general sentiment, with regard to emerging market investments, was positive in 2017. Foreign investors put in around $235 billion in emerging market stocks and bonds in 2017 compared with $152 billion in 2016.

Moreover, recent exemptions by the United States related to its tariff plans supported emerging market investments. Another positive is easing tensions between Washington and Beijing, as new signs have emerged that China and the United States are in the middle of negotiations to avert a war which would have made a long lasting impact on the global economy.

Although the greenback lost value in recent trading sessions owing to fears of a trade war, it recouped some of the losses following signs of negotiations between the world’s largest economies. Moreover, since fears of faster rate hikes have somewhat subsided, a massive gain in the greenback is not expected anytime soon.  

Emerging markets might gain in case the Fed goes slow on rate hikes, as these investments fall out of favor when the Fed speeds up policy tightening. This is primarily because a reduction in the interest rate differential between the United States and emerging markets reduces the attractiveness of the latter.

Let us now discuss a few ETFs focused on providing exposure to the emerging market space.

iShares Core MSCI Emerging Markets ETF IEMG

This fund provides exposure to emerging market equities.

It has AUM of $49.7 billion and charges a fee of 14 basis points a year. From a geographical perspective, it has 28.9% exposure to China, 14.9% to South Korea and 12.4% to Taiwan. Technology, Financials and Consumer Discretionary are the top sectors of the fund, with 26.3%, 22.1% and 10.5% allocation, respectively. Tencent Holdings, Samsung Electronics Ltd and Alibaba Group Holding are the top holdings of the fund, with 4.8%, 3.5% and 3.3% allocation, respectively. The fund has returned 24.1% in a year. IEMG has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Vanguard FTSE Emerging Markets ETF VWO

This is one of the most popular funds offering exposure to the emerging market space.

It has AUM of $69.0 billion and charges a fee of 14 basis points a year. From a geographical perspective, it has 32.7% exposure to China, 14.4% to Taiwan and 10.9% to India. Financials, Technology and Consumer Discretionary are the top sectors of the fund, with 25.0%, 21.0% and 10.0% allocation, respectively. Tencent Holdings, Taiwan Semiconductor Manufacturing Co. Ltd. and Naspers ltd are the top holdings of the fund, with 5.2%, 3.6% and 2.1% allocation, respectively. The fund has returned 20.0% in a year. VWO has a Zacks ETF Rank #3 with a Medium risk outlook.

iShares MSCI Emerging Markets ETF EEM

This fund is another well-liked option in the space, offering exposure to emerging market equities.

It has AUM of $42.8 billion and charges a fee of 69 basis points a year. From a geographical perspective, it has 30.0% exposure to China, 14.7% to South Korea and 11.6% to Taiwan. Technology, Financials and Consumer Discretionary are the top sectors of the fund, with 27.7%, 24.0% and 9.6% allocation, respectively. Tencent Holdings, Samsung Electronics Ltd and Alibaba Group Holding are the top holdings of the fund, with 5.5%, 4.0% and 3.8% allocation, respectively. The fund has returned 24.0% in a year. EEM has a Zacks ETF Rank #3 with a Medium risk outlook.

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