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Is It Time to Buy the iShares MSCI Emerging Markets ETF (EEM)?

EEM Total Return Price Chart
EEM Total Return Price Chart

EEM Total Return Price data by YCharts .

More recently, though, emerging-market stocks have been almost stagnant, even as the U.S. market has soared. Over the past three years, the iShares ETF has a negative total return compared to impressive gains for the S&P 500.

EEM Total Return Price data by YCharts .

The recent weakness of emerging markets compared to U.S. stocks reflects some investors' doubts about the future growth prospects of the world's most exciting opportunities. Some believe that central bank policies have propped up emerging-market stocks and that the end of programs like the Federal Reserve's quantitative easing could have a bigger impact on emerging markets than on developed economies like the U.S., Japan, and Western Europe. Yet contrarian investors argue that economic growth continues in emerging markets and that the failure of stocks to rise in concert could present a buying opportunity.

Is the iShares ETF a good value right now?

From a valuation standpoint, emerging-market stocks have rarely looked like a better bargain. MSCI says its emerging-markets index has a price-to-earnings ratio of just over 13 and a price-to-book ratio of 1.57. That's far lower than the global stock market's P/E of 17 and P/B of 2.07, suggesting that investors are in fact discounting the ability for emerging-market companies to keep up with their developed-market counterparts.

What's uncertain is whether the trends that have held emerging markets back will reverse themselves in the near future. Commodities have played a big role in the rise of such markets, but the reversal of bull markets in commodities over the past couple years put a large dent in overall emerging-market stock sentiment. Moreover, economic instability in China and other major emerging markets has some economists worried about the sustainability of their growth, and a systemic threat to the newly established financial infrastructure in emerging-market countries could create massive disruptions. Those fears are keeping many investors out of the iShares ETF and other emerging-market investments.

Source: NASA.

Is the iShares MSCI Emerging Markets ETF the best choice for emerging-markets investors?

Investors have to decide whether the iShares ETF or the Vanguard ETF is the best way to play emerging markets, should they choose to do so. The iShares ETF has done better over the past five years, but the Vanguard ETF had better returns over the past one- and three-year periods. Moreover, the Vanguard ETF's 0.15% expense ratio is barely a quarter of what the iShares ETF charges.

The two ETFs have subtle differences, though. Because it tracks a different index, the iShares ETF includes exposure to South Korea that the Vanguard ETF lacks. Even among those countries that both ETFs share, the proportions are different, leading to varying results.

Despite its cost disadvantage, the iShares ETF is a popular and reasonable way to get emerging-market exposure for your portfolio. With most investors remaining extremely reluctant to commit to emerging markets during this time of market uncertainty, contrarian investors who believe that fears of collapse are overblown could easily see now as a great time to buy the iShares MSCI Emerging Markets ETF.

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The article Is It Time to Buy the iShares MSCI Emerging Markets ETF ( EEM )? originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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