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This trade is a surprising winner—and it could get even better

This trade is a surprising winner—and it could get even better

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This trade is a surprising winner—and it could get even better

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This could signal trouble for stocks

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This could signal trouble for stocks

Think worldwide geopolitical troubles are hurting emerging markets? Think again.

The ETF that tracks 838 emerging market shares from 17 countries (trading under the ticker symbol EEM) is now near its highest levels since 2011. In fact, were it not for the 1 percent it gave back on Thursday, the EEM would be trading at, well, 1 percent ahead of the U.S. benchmark S&P 500 index on a year-to-date basis.

So why the disconnect between headlines in places like Ukraine and returns on the EEM?

Some of that has to do with composition. Russian stocks make up less than 5 percent of the ETF; no Ukrainian stocks are in it. What’s more, the countries heavily weighted in the EEM have had pretty good runs as of late, especially Brazil.

Country

Weight in EEM

Index

August returns

YTD returns

China

18.04%

Shanghai All Ordinaries

0.7%

3.8%

South Korea

14.98%

KOSPI

0.3%

3.7%

Taiwan

11.86%

Taiwan Weighted Index

2.5%

10.2%

Brazil

11.52%

Bovespa

8.0%

17.1%

South Africa

7.51%

Dow Jones South Africa

2.4%

12.1%

Todd Gordon, founder of TradingAnalysis.com, believes the charts on the EEM show more upside ahead, and would use Thursday’s selloff to position a buy.

He sees a chance of the ETF’s price breaking a long-term downtrend begun at the market peak just before the financial crisis in 2008-2009. With the EEM now down a little closer its Aug. 7 low of $43.14, Gordon believes traders can go long in anticipation for an eventual break above the downtrend.

(Watch: Fewer economists believe US policy on right track)

“Emerging markets are getting ready to break out,” said Gordon, a CNBC contributor. “We’re at a very delicate position right here.”

The EEM isn’t just being helped by a cut in South Korean interest rates and strength in Brazil. It’s also being helped by the performance of some of its top holdings, notes Gordon, adding “EEM has been on kind of a tear.”

Company (returns in domestic currency except China Mobile)

Weight in EEM

August returns

YTD returns

Samsung

3.11%

-3.9%

-9.5%

Taiwan Semiconductor

2.42%

3.5%

19.9%

Tencent Holdings

1.99%

-0.3%

29.2%

China Mobile

1.72%

13.2%

18.1%

Gina Sanchez, founder of Chantico Global, who has been recommending her clients go long the EEM for the past six months, thinks some of that optimism should be tempered.

“We have seen some improving GDP numbers and upgrading of forecasts through the emerging markets, particularly with Asian exports,” said Sanchez, a CNBC contributor. “However, we are seeing some waning Chinese investment and we’ve seen some waning commodity exporters. That’s not necessarily good. That tends to bring pressure to the emerging markets.”

(Read: Asia stocks ease in quiet trade; Qantas surges nearly 7%)

Another concern of Sanchez is that fund flows into EEM have slowed. Though it is one of the top ETFs in terms of inflows for the month of August (taking in more than $1.8 billion this month, according to the fund’s own data), the past week has seen it slow to a trickle of just $75.6 million.

“The inflows have been quite strong for many months until August,” said Sanchez. “In August, we started to see a significant slowing and that slowing has continued even as the U.S. markets have rebounded dramatically. And I think that may be something to watch for in terms of turning sentiment and investor willingness to take risks.”

To see the full discussion on the EEM, with Gordon on the technicals and Sanchez on the fundamentals, watch the video above.

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