Emerging Market ETFs That Avoid Europe

Emerging market exchange traded funds have burst from the gate in 2012 on signs of improvement in the global economy and a stock rally that’s favored riskier sectors.

Although volatile, emerging market ETFs could see further gains if European leaders can find a way to ease concerns over Greece and banks’ exposure to sovereign debt.

“To the extent the situation in Europe does not degenerate into a full-blown crisis, even a modest improvement in liquidity and sentiment would be supportive of emerging market stocks,” writes iShares chief investment strategist Russ Koesterich in a market outlook.

He said factors supporting emerging market ETFs include faster economic growth, improving sentiment from low levels, better credit conditions, and valuation, since they are trading at a premium to developed markets. [Emerging Market ETFs Could Rally More on Economy, Valuations]

Vanguard Emerging Markets (NYSEArca: VWO) and iShares MSCI Emerging Markets (NYSEArca: EEM) are among the largest diversified ETFs tracking emerging markets. [Emerging Market ETFs Double S&P 500’s Gain]

“While we would generally advocate an overweight to emerging markets in 2012, we believe investors can further improve performance by unbundling that exposure into more granular unites, i.e., country or regional exposures,” the strategist wrote.

In particular, investors “should overweight Latin America and to a lesser extent emerging Asia, while significantly underweighting emerging Europe.”

The iShares MSCI Emerging Markets has over 10% in emerging Europe, according to Morningstar.

To avoid Europe, investors might consider the relatively new iShares MSCI Emerging Markets Latin America (NasdaqGM: EEML) and iShares MSCI Emerging Markets Asia (NasdaqGM: EEMA) , Koesterich said.