Select, and that word should be emphasized, emerging markets
have not impressed since the start of the year.
The two biggest members of this asset class as measured by
assets under management, the Vanguard FTSE Emerging Markets ETF
) and the iShares MSCI Emerging Markets Index Fund (NYSE:
) are of 1.18 and 1.35 percent, respectively.
Some country-specific funds have been worse. Actually, some
have been downright dreadful and can easily be placed
in the falling knife category
In other words, there is no denying that when an investor
takes a broad view of things, emerging markets ETFs probably are
not the most attractive funds to get involved with at the moment.
EEM and VWO seem to affirm that assertion, but speaking of
emerging markets ETF in generalities is not always the most
accurate way of approaching the subject.
Arguably, it creates a situation where some prevalent myths
need to be busted, starting with...
Correlations to U.S. Stocks Conventional wisdom holds that
emerging markets equities are a volatile asset class that can
serve as useful gauge of investors' willingness to embrace
riskier fare. From there, some might assume that if emerging
markets are not in favor, then riskier assets such as equities
are generally not in favor.
The next logical step under this scenario is assuming U.S.
equities might be in for a pullback due to the slack performances
of their emerging markets peers.
Not so fast. Over the past three years, EEM has a correlation
of just 0.24 to the SPDR S&P 500 (NYSE:
) while VWO's three-year correlation to SPY is just 0.22,
according to State Street data
The chasm between U.S. stocks and this pair of diversified
emerging markets ETFs appears to be widening. Over the past year,
SPY has jumped 12.7 percent while EEM and VWO are each down about
two percent. Year-to-date, EEM and VWO are both down more than
one percent while SPY is up 8.7 percent.
Those statistics confirm that even while investors
pull money from some emerging markets ETFs
, they are not eschewing U.S. stocks to a similar degree.
Not All Emerging Markets Have Been Bad The problem with
highlighting the slack performances of ETFs such as EEM and VWO
is that those conversations give off the impression that all
emerging markets have recently been slack performers. In reality,
that is not the case and investors need to examine which
countries truly drive price action in diversified emerging
markets ETF before believing all developing world stocks are
Take EEM as an example. China, South Korea, Brazil and Taiwan
combine for over 56 percent of that ETFs. Of the four largest
ETFs tracking those countries, only the iShares MSCI Brazil
Capped Index Fund (NYSE:
) is higher year to date and that ETF only moved into the green
Throw in the fact that South African
Indian and Malaysian stocks have performed
and it is easy to see why diversified emerging markets ETFs have
struggled. Those three countries combine for almost 17 percent of
Those statistics should not be ignored, but they do not mean
all emerging markets have performed poorly this year. For
example, focusing on two of 2012's leaders - the iShares MSCI
Thailand Capped Investable Market Index Fund (NYSE:
) and the iShares MSCI Philippines Investable Market Index Fund
) - has proven efficacious. Those two ETFs are up an average of
14 percent year-to-date.
Another example is the Market Vectors Indonesia ETF (NYSE:
), which has surged 12.4 percent year-to-date. Bottom line: Not
all emerging markets have slumped this year. Implying that is the
case simply by using broad ETFs as the guide is inaccurate.
For more on ETFs, click
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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