A Near-Term Bounce for Emerging Market ETFs?

ETF Trends

It is going to take more than one decent day to erase the steep declines absorbed by large, diversified emerging markets ETFs over the past month. Heading into the start of trading Tuesday, the Vanguard FTSE Emerging Markets ETF (VWO) and the iShares MSCI Emerging Markets Index Fund (EEM) , the two largest emerging markets ETFs, were down 14.8% and 13.3%, respectively, over the past four weeks.

Both are up at least 1.4% in late trading Tuesday. That may not be an invitation to make a long-term commitment to either ETF at current levels, but there are some signs sellers may be getting tired. In an email to ETF Trends, Street One Financial President Paul Weisbruch highlighted closing put selling in EEM and VWO and a subsequent bounce in the ETFs Tuesday morning. [Hedge Funds Using ETFs For Trades]

There are still risks in the emerging markets universe. EEM, for example, is not far removed from long-term support around $35, an area that if violated, could lead to intense selling pressure. “While we must give support – the bottom of a trading range – the benefit of the doubt, it is very hard to imagine that emerging markets will hit it and suddenly find a long-term floor. A short-term bounce suitable for short-term trading seems to be more in line,” reports Michael Kahn for Barron’s.

China remains a concern as well. “China is unfortunately no longer ‘Emerging’, and not a good growth driver, so those portfolio managers that continue to buy EEM/VWO as a high beta way to play the market, are playing with beta and that’s about it, they are not adequately compensated for the risk taken in terms of future growth prospects,” said Weisbruch. [China ETFs Fall After PBoC Comments]

Options activity in the embattled iShares MSCI Hong Kong Index Fund (EWH) , albeit not an emerging markets ETF, offers some hope. “Year to date, EWH has seen north of $700 million leave the fund via redemption flows, and this morning we note in our options recap that the September 19 calls received heavy play yesterday (more than 100,000 contracts traded versus open interest of 213 contracts),” wrote Weisbruch in a note published Tuesday. [ETF Chart of the Day: Hong Kong]

EWH is up 1.8% in late Tuesday trading, but the ETF entered the session with a one-month loss of 11%.

iShares MSCI Hong Kong Index Fund

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EWH625

ETF Trends editorial team contributed to this report. Tom Lydon’s clients own shares of EEM.

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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