The emerging markets have regained their sheen and are once again the big contributor to global recovery after the U.S. After a dreadful 2013, emerging market stocks rebounded strongly on cheap valuations and improving global economic conditions.
In fact, emerging market stocks have clearly outperformed the developed and global world so far this year. This is especially true as the ultra-popular Vanguard FTSE Emerging Markets ETF (VWO) has gained nearly 7.7% in the year-to-date time frame compared with gains of 5.5% for iShares MSCI EAFE Index (EFA) and 7.1% for Vanguard Total World Stock ETF (VT). This suggests strong growth and bullishness in these countries moving into the second half.
The optimism was propelled by positive developments in key emerging markets and some concerns over U.S. economic growth, which had stalled economic recovery in the first quarter. China, the second largest economy, is now showing signs of improvement as its manufacturing activity expanded at the fastest pace this year.
The Purchasing Managers’ Index rose to 51 in June from 50.8 in May while HSBC Purchasing Managers’ Index climbed to 50.7 from 49.4 last month on strong orders and rising exports. Hopes for new government measures to bolster the depressed politics-ridden economy are also fueling growth in India, Brazil, Turkey and Thailand. Russia is also seeking to ease tensions in Ukraine (read: 3 Brazil ETFs Surging This Year).
Further, stocks in the MSCI Emerging Markets Index are currently trading at attractive levels of 10.9 times estimated earnings for the next 12 months, according to Bloomberg. This is much below the 15.1 times estimated earnings for the next 12 months for the equities of most developed economies.
As a result, lofty valuations in the developed world have compelled investor to escape from the expensive stocks to cheaper ones. Growing confidence that the Fed will keep its interest rates near zero for more months even after QE wrap-up added to further rally in the emerging stocks.
Given the optimism and promising growth outlook, investors seeking to ride out this surge might want to tap the space in the ETF form. For those investors, we have highlighted three top performing emerging market ETFs in the year-to-date time frame.
While broad emerging space has rewarded handsome returns, the ride has been extremely smooth across the emerging Asia-Pacific space. This outperformance is likely to continue in the coming months given the favorable sentiments (see: all the Asia Pacific Emerging ETFs here).
Market Vectors India Small-Cap Fund (SCIF) – Up 66.1%
This fund provides exposure to the small cap segment of the Indian equity market by tracking the Market Vectors India Small-Cap Index. It has accumulated about $204 million in capital, propelling its asset base to $413.3 million. Volume is good, with 179,000 shares per day exchanged in hand while expense ratio is higher at 0.93%.
Holding 94 securities, the product is well spread out across each component as none of these accounts for more than 3.50% share. From a sector look, financials, consumer discretionary and industrials take the top three spots with more than 20% of assets each. SCIF currently has a Zacks ETF Rank of 3 or ‘Hold’ rating with Medium risk outlook (read: Indian Elections Led to a Surge in These 3 ETFs).
iShares MSCI Indonesia Investable Market Index Fund (EIDO) – Up 19.0%
This is the most popular ETF tracking the Indonesian market with AUM of $486.5 million and average daily volume of more than 605,000 shares. The fund has pulled in over $95 million in capital this year and follows the MSCI Indonesia Investable Market Index. It holds 106 securities with a tilt toward large caps and charges 62 bps in annual fees (read: Inside the Indonesia ETF Turnaround).
The product is somewhat concentrated across both sectors and securities. The top two firms account for nearly 10% of the total assets each while from a sector look, financials dominates the fund’s return with one-third share. The ETF has a Zacks Rank of 4 or ‘Sell’ rating with High risk outlook.
iShares MSCI Philippines Investable Market Index (EPHE) – Up 17.9%
This product targets Philippines stocks in the emerging Asia Pacific space and tracks the MSCI Philippines Investable Market Index. The fund has gathered nearly $49 million in asset, taking the total base to $361.8 million. Volume is good as it trades around 29,000 shares per day while charges 62 bps in annual fees (read: Philippines ETF in Focus on Recent Central Bank Decision).
The fund holds a small basket of 43 firms, with roughly 59% of assets invested in the top 10 holdings, suggesting a high concentration risk. More than one-third of the portfolio is dominated by financials while industrials occupies the second position with 26.5% share. The fund has a Zacks ETF Rank of 3 with Medium risk outlook.
These ETFs could be worthwhile when the emerging space is seeing improvement. This is especially true given that the slowdown in Europe and Japan as well as uncertainty in the U.S. have clouded the developed space.
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