One takeaway from this year’s emerging markets sell-off is that investors need to be ultra-selective when evaluating exchange traded funds that hold developing world equities.
Following the second-quarter spike in Treasury yields that exposed emerging markets saddled with heavy external financial burdens (think Indonesia as a prime example), investors started to prize those markets with tidier balance sheets and current account surpluses. That trait proved to be a significant catalyst for South Korean equities and the iShares MSCI South Korea Capped ETF (EWY) . [A Bullish Case for South Korea ETFs]
Barclays Wealth Management says that investors should favor “higher foreign direct investment, lower current account deficits and debt loads, and stronger GDP growth,” reports Shuli Rhen for Barron’s. Barclays ran a screen for Barron’s using the following four metrics:
- A current account deficit of no more than 4%;
- Debt to GDP ratios of 60% or lower
- Real GDP growth of 3% or higher
- Above average foreign direct investment
In addition to EWY and other South Korea ETFs, single-country funds that give investors exposure to those traits include China ETFs, the iShares MSCI Chile Capped ETF (ECH) , the iShares MSCI Taiwan ETF (EWT) and the iShares MSCI Malaysia ETF (EWM) . [Momentum for the Malaysia ETF]
Chile and ECH making the cut is something of a surprise given the weakness in Latin American markets this year and that country’s correlation to the copper trade. ECH has plunged 25.6% this year, a performance that is worse than even its downtrodden Brazilian counterpart. To boot, Chile is not particularly inexpensive on valuation. ECH currently trades around $46, its lowest level in over four years. [Worst Global Markets by Single-Country ETFs]
Malaysia and Taiwan are also a tad on the pricey side, but not overly so and that could be the result of investors pushing equities higher in those countries because of current account surpluses. South Korea trades at 6.4% discount. MSCI Malaysia’s P/E ratio is about 7.5% higher than its long-term average; Taiwan’s is 4% higher, Barron’s reported citing Barclays.
Investors can access those three countries via an array of diversified emerging markets ETFs, including the PowerShares S&P Emerging Markets Low Volatility Portfolio (EELV) . Taiwan, South Korea and Malaysia (in that order) combine for about 53% of EELV’s weight. The rival iShares MSCI Emerging Markets Minimum Volatility ETF (EEMV) allocates over 36% of its weight to those countries. Both of those “low vol” ETFs have outpaced traditional multi-country emerging markets ETFs this year. [Some Low Vol ETFs Worked in 2013]
The new SPDR MSCI EM Beyond BRIC ETF (EMBB) allocates about 40% of its weight to South Korea, Taiwan and Malaysia. EMBB debuted in early December and has $6 million in assets.
iShares MSCI Emerging Markets Minimum Volatility ETF
ETF Trends editorial team contributed to this post.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
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