Emerging market ETFs have been out of favor for most of the last year as a "risk off" approach has dominated due to the EU debt crisis and soft global economy. However now that it appears another round of financial liquidity is likely in the United States -- and in other markets around the world -- it may be a good time to revisit these "risk on" markets. Through ETF offerings let's examine emerging markets as a whole and then view several of the most heavily weighted emerging markets to see where opportunities may exist.
Today two broad based emerging markets ETFs dominate the space. The largest ETF is the Vanguard MSCI Emerging Markets ETF (VWO) at $52 billion in assets. It tracks the same index as the iShares MSCI Emerging Markets ETF (EEM), the runner up with $34 billion in assets. The main difference between the funds is that VWO is priced at 20bps in comparison to EEM's 67bps expense ratio. This had led to material out performance by VWO in 2012, as emerging markets returns have been positive but not bountiful. Here's a year to date comparison of the two ETFs from the NASDAQ's interactive chart center.
Not only has VWO outperformed EEM, it has taken in the lion's share of fund flows this year according to Index Universe's fund flow data. Here's the year to date comparison.
VWO's country exposure has a healthy dose of BRIC countries which are Brazil, Russia, India and China. Including BRIC related entities like Taiwan, Hong Kong and Malaysia the BRIC region represents just over 50% of VWO's country weighting. Here's the latest country holdings breakdown of VWO from ETF research site XTF.
Taking a closer look at the countries that dominate the index reveals winners and losers this year. In the chart below the performance of six country ETFs versus VWO is highlighted. They include:
- iShares MSCI Brazil Index Fund (EWZ)
- Market Vectors Russia ETF (RSX)
- WisdomTree India Earnings Fund (EPI)
- iShares FTSE China 25 Index Fund (FXI)
- iShares MSCI South Korea Index Fund (EWY)
- iShares MSCI Taiwan Index Fund (EWT)
Here's the annotated one year comparison chart displaying the individual country ETFs representing most of the heavily weighted countries in VWO.
Taiwan (EWT), India (EPI) and South Korea (EWY) have been positive markets for VWO this year while Brazil (EWZ) and China (FXI) have disappointed. Taking a closer look at the last month, as markets have begun to swing to a "risk on" posture, shows several new developments however. Here are the same ETFs but viewed by performance over the last 30 days.
Notable differences include EWZ (Brazil) making the top three, RSX (Russia) on a spike upward to become the second best performer and EPI (India) on a descent that appears to make it a candidate for worst performer next to FXI (China). Also all the ETFs shown have gained between 4 - 11% in the last thirty days. These trends are important to note as they represent several year long trends being reversed, perhaps due to investor risk tolerance increasing.
Emerging markets offer investors a rate of growth and type of demographic that is virtually unavailable in developed countries today. While these markets carry more risks, they also carry more rewards. Should the global economy begin to become more productive and stable, emerging markets stand to benefit significantly. In the meantime, being selective among the emerging markets may be the best approach to capture attractive returns.