How One Strategist Uses Emerging Markets ETFs

ETF Trends

Emerging markets exchange traded funds are bouncing back from Monday’s Ukraine-induced drubbing, but many of the genre’s marquee names still have a long way to go regain investors’ trust…and assets.

When playing developing economies, many investors opt for the diversified approach offered by ETFs such as the iShares MSCI Emerging Markets ETF (EEM) , Vanguard FTSE Emerging Markets ETF (VWO) and the WisdomTree Emerging Markets Equity Income Fund (DEM) due to the difficulties and risks associated with selecting single-country funds.

“ Choosing country ETFs can be a daunting task, and to that end, we think the Emerging Market Equity strategy offered by the ETF asset manager Glovista is worth learning about,” said S&P Capital IQ in a new research note. “The team’s strategy focuses initially on global macroeconomics, which includes a crafting a view that on business cycles, interest rates, currencies of developed markets (Japan, Europe and the U.S.), and commodities and comparing these opinions with the general consensus. This process allows some major investment themes to materialize. The team then provides a macroeconomic assessment of each of the countries within the MSCI Emerging Market Index to determine in which country to increase exposure.”

Glovista also conducts analysis of largest holdings in country ETFs because many of those emerging markets funds are highly concentrated in a small number of stocks. [China ETFs Without The Banks]

Glovista primarily uses iShares ETFs and the investment firm had little to no exposure to Brazil, South Africa and South Korea at the end of last year, according to S&P Capital IQ. [Ellen Would Love This New ETF]

Currently, the strategist’s largest position in an emerging markets country-specific fund is the iShares MSCI Taiwan ETF (EWT) , which S&P Capital IQ rates marketweight. Glovista “ believes with Taiwan’s current account surplus and foreign exchange reserves gives the country a relatively stable macroeconomy,” said S&P Capital IQ. [Trade Surplus EM ETFs]

EWT allocates over 54% to technology stocks. Tech was the best-performing sector in the MSCI Emerging Markets Index for the three-year period ending Dec. 31, 2013.

According to S&P Capital IQ, Glovista’s third-largest position is the iShares MSCI Russia Capped ETF (ERUS). Like rival Russia ETFs, ERUS tumbled on Monday on fears of escalating tensions in Ukraine. Sources of potential allure for Russia ETFs include valuations that are deeply discounted relative to long-term standards and the broader emerging markets universe along with Russia’s favorable dividend policy. S&P Capital IQ rates ERUS overweight.[Russia ETFs Plunge on Ukraine Headlines]

Glovista also holds stakes in the iShares MSCI China ETF (MCHI) and the iShares MSCI Chile Capped ETF (ECH) . S&P Capital IQ has a marketweight rating on MCHI and does not rate ECH.

iShares MSCI Taiwan ETF

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Tom Lydon’s clients own shares of DEM and EEM.

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