Emerging markets had an ugly performance during the first half of the year, seem to be slowly returning back on track, thanks to a no taper announcement by the Fed in its September policy and a bout of recent encouraging data. (read: 3 ETFs to Profit from the Manufacturing Upswing)
The HSBC Emerging Markets Index (EMI) figure for the month of November is one of the indicators signaling the gradual strength. The index rose to 52.1 from 51.7 in October. Though modest it still signifies that emerging markets are bound upward as any number above 50 symbolizes a growth trend.
Moreover, November's EMI growth indicates accelerating business activity since March this year across the emerging markets at large. The rise in business activity is mainly buoyed by a boost in the manufacturing sector. (“EMI is a monthly indicator derived from the national HSBC Purchasing Managers’ Index (PPMIQ) reports of 17 emerging economies.”)
The pick up in the manufacturing sector was largely driven by a revival in new export orders. Before we analyze the emerging market ETFs which could stand to gain from the export boom, let’s dig a little deeper at the performance of these emerging economies. (read: Buy These Emerging Market ETFs on the Upswing)
Inside the Emerging Economies
New export orders from South Korea grew steadily in November led by strong demand from some of the key Asian markets. Moreover, the manufacturing sector in Taiwan picked up the most in almost one and a half year. A healthy backlog as well as rise in the output spurred growth.
India also witnessed a surge in manufacturing activities. Leading companies ramped up their production for the first time since April, following a wave of new orders. Manufacturing activities within the world’s second largest economy – China – also witnessed an upward trend.
The world’s second largest economy – China – recently surprised the market with its November export figures. China’s exports for the month of November rose 12.7% year over year to $202.21 billion, clearly outpacing the consensus estimate of 7% year-over-year growth. (read: Upbeat China Exports Put These ETFs in Focus)
Brazil also saw a rise in manufacturing output in November, though the rate was nominal. In spite of a stable new export business, total fresh orders fell.
Emerging Market ETFs in Focus
Given the recent upbeat data, investors seeking to invest via the ETF route can keep a track of the ETFs mentioned below. Emerging market economies can benefit going forward, if the surge in export continues in the following months.
Investors should note that the below mentioned ETFs have a Zacks ETF Rank “2’ and are thus expected to outperform in the months to come.
Vanguard FTSE Emerging Markets ETF (VWO)
This ETF is the most popular and the largest fund among the emerging market space and manages a huge asset base of $45.7 billion. With annual fees of 18 basis points it is also one of the cheapest within its category.
The product holds a basket of 922 stocks, with the concentration level in the top 10 holdings at 16.7%, suggesting that the fund is spread among various companies as well.
Sectoral holding of VWO relies heavily on Finance (25.55%), followed by Technology (11.71%), Basic Materials (10.5%) and Energy (10.7%), each with double-digit exposure. The product has the largest exposure to China (18.69%), followed by Brazil (12%) and Taiwan (10.91%). (read: 3 Financial ETFs to Watch on Volcker Rule Implementation)
The product has returned 3.29% in the past one month.
iShares Core MSCI Emerging Markets ETF (IEMG)
The ETF tracks the MSCI Emerging Markets Investable Market Index, giving investors exposure to a huge basket of 1760 companies. The fund has an AUM of $2.6 billion while charging investors the same fees as VWO. The product is well spread across individual stocks with the top three holdings being Samsung Electronics Co Ltd, Taiwan Semiconductor Manufacturing Co Ltd. and China Mobile Ltd.
Sectorally, like VWO, this fund also has the highest allocation to the Financial sector (21.94%), followed by Technology (14.71%) and Consumer Cyclical (8.85%). Country wise, China occupies the top spot (17.92%), followed by South Korea (13.35%) and Taiwan (12.31%).
The fund added 3.36% during the last one month.
iShares MSCI Emerging Markets Minimum Volatility Index Fund (EEMV)
The fund provides exposure to low volatility stocks in the global emerging market space by tracking the MSCI Emerging Markets Minimum Volatility Index. It is also one of the largest ETFs with about $2.5 billion in AUM while volumes are pretty good. The fund charges 25 bps in fees and expenses.
With 225 holdings, the product allocates a small portion in each of the securities (less than 1.60%) that could keep the portfolio balanced among the various companies and prevent heavy concentration. From a sector look, Financials dominate this fund making up for 26.42% of the basket. China (19.46%), Taiwan (16.32%) and South Korea (11.67%) are the top countries in terms of exposure.
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