Well-documented have been the struggles of emerging markets
equities this year relative to U.S. stocks.
Concerns about global growth, commodities demand, inflation
and other issues have plagued developing stocks and, particularly
at the ETF level, some of the worst laggards
have also been the largest emerging markets
. That roster includes the four BRIC nations along with South
Korea and Taiwan.
Still, investors are putting some cash to work in emerging
, though at a much slower clip than what was seen last year. In
2012, emerging markets ETFs and ETNs raked in $30.5 billion in
capital, but that figure was just $4.6 billion in the first
quarter after outflows of $4.7 billion in March alone,
according to BlackRock data
Investors are also eschewing country-specific funds in favor
of diversified emerging markets ETFs, though the iShares MSCI
Mexico Investable Market Index Fund (NYSE:
) gained $1.2 billion in inflows. Despite the struggles of the
broader emerging markets group, some analysts see opportunity
within the asset class.
S&P Capital IQ "believes that the expected stronger
economic growth is driven by better demographic trends; lower
worker to retiree ratios; a growing middle class; rapid
urbanization, which fuels infrastructure spending and raw
material demand; and natural resource wealth," the research firm
said in a new note.
Beyond the BRIC quartet of Brazil, Russia, India and China
S&P Capital IQ "advises casting a wide net to include
lower-profile markets like Indonesia, Turkey and Mexico where
performance has been much stronger than the BRIC markets in
recent years, reflecting steadier growth, lower inflation and an
uptick in investor interest."
In the note, S&P Capital IQ highlighted six diversified
emerging markets ETFs, but only one earned an Overweight rating,
the iShares Core MSCI Emerging Markets ETF (NYSE:
). IEMG debuted last October as part of the new core series of
ETFs from iShares aimed at cost-conscious investors. Rather than
lower the fees on the iShares MSCI Emerging Markets Index Fund
) to be comparable to the rival Vanguard FTSE Emerging Markets
), iShares created IEMG.
It is hard to argue with the success iShares has had with the
new fund. In just seven months, IEMG's low expense ratio of 0.18
percent has helped the fund attracted almost $915 million in
according to iShares data
IEMG is comparable to other major diversified emerging markets
ETFs in that it devotes the bulk of its weight to China, South
Korea, Brazil and Taiwan. Those countries combine for over 55
percent of the fund's weight. EEM also devotes over 55 percent of
its weight to those countries. VWO, the largest emerging markets
ETF by assets, is gently winding down its exposure to South Korea
as Vanguard transitions to the FTSE Emerging Markets Index, which
does not consider South Korea a developing market.
VWO and EEM, the second-largest emerging markets ETF by
assets, are rated Marketweight and Underweight, respectively, by
S&P Capital IQ.
S&P acknowledged some of the risks associated with
investing in the developing world in the note.
"While emerging markets offer investors higher potential
rewards, they come with risks," said the research firm. "Relative
to the S&P 500 Index three-year standard deviation of 15, the
MSCI Emerging Markets Index's standard deviation of 21 was quite
high. Emerging markets have less capital market liquidity and
transparency than developed markets but that that is reflected in
much lower valuations than developed markets, with the MSCI EM
Index trading at just 10.7X 2013 consensus estimated EPS vs.
14.2X for the S&P 500 and 12.7X for the S&P Europe 350
Investors looking to mitigate emerging markets volatility have
a couple of options as the low volatility craze seen with
has permeated developing world funds as well
. S&P has a Marketweight rating on the PowerShares S&P
Emerging Markets Low Volatility Portfolio (NYSE:
), which debuted in January 2012 and now has nearly $131 million
EELV tracks the S&P BMI Emerging Markets Low Volatility
Index. As of February, this S&P index's standard deviation
was 16, well below the MSCI Emerging Markets Index, according to
S&P. EELV allocates about half of its weight to Malaysia,
Taiwan and South Africa. The fund has an annual expense ratio of
Interestingly, S&P has Underweight ratings on two
country-specific ETFs that have been leaders among emerging
markets funds this year. The iShares MSCI Turkey Investable
Market Index Fund (NYSE:
) is up seven percent year-to-date and was one of the
top-performing emerging markets ETFs last year.
The iShares MSCI Indonesia Investable Market Index Fund (NYSE:
) also earned an Underweight rating from S&P, though that ETF
has surged 10.7 percent on a year-to-date basis. EIDO and rival
Indonesia ETFs have been buoyed by the country's
strong domestic demand story
Indonesia, the world's fourth-largest country by population,
is expected to post GDP growth this year of 6.25 percent this
year, up slightly from 6.23 percent in 2012. Amid rising
inflation and slack materials demand, the Jakarta Composite and
EIDO will likely need strong contributions from discretionary and
staples shares to continue to the upside.
For more on ETFs, click
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