Emerging Markets Seasonality Revisited

ETF Trends

Plenty of seasonal trends are at play this month and into the first quarter. Beleaguered emerging markets investors are hoping that some positive seasonality kicks in for their favorite exchange traded funds because, for the most part, 2013 has been tough year to be long developing world equities.

Several weeks ago, we examined a seasonal switching strategy developed by Dorsey Wright & Associates that makes use of the PowerShares DWA Emerging Markets Momentum Portfolio (PIE) and the PowerShares S&P Emerging Markets Low Volatility Portfolio (EELV).

The meat of that strategy is investors can improve their returns by allocating 70% to EELV and 30% PIE to during the worst six-month period for stocks, May through the end of October, and by shifting to 70%/30% EELV during the best six-month period, November through the end of April. [ETFs for Emerging Markets Seasonality]

Likewise a 100% EELV allocation during the worst six months led to lower losses and a 100% allocation to PIE during the November-April 30 time frame resulted in significantly higher gains. In that scenario, EELV returned 324% dating back to 1999, but that is barely more than half what PIE returned, according to Dorsey Wright data.

EELV may be positioned for upside regardless of seasonal trends because of its exposure to lower beta, account surplus emerging markets. For example, Taiwan, Malaysia and South Korea combine for over 48% of the ETF’s weight. Investors have taken note of EELV’s advantages as $140.45 million of the ETF’s $225.4 million in assets under management have come into the fund this year. [Low Volatility ETFs Still Popular With Risk-Averse Investors]

PIE is positioned as a momentum ETF, indicating it is more suitable for the best six-month period, but the ETF’s combined 43% weight to Taiwan, China and South Korea indicates the fund is not ultra-risky.

Back to the combined use of EELV and PIE. This is how potent the strategy has been when opting for a 50/50 portfolio of each: A $100,000 investment in May 1999 would have been worth over $421,200 at the end of October 2013, according to Dorsey Wright data. However, that pales in comparison to the $514,200 the 70/30 seasonal switching strategy delivered. Both sets of returns handily beat a traditional emerging markets benchmark.

EELV/PIE Seasonal Switching Performance

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Chart Courtesy: Dorsey Wright & Associates

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