The trading scene in the emerging markets, in particular the Asia-Pacific region, took a turn for the worse over the past few months with heightened fears of the Fed curbing its stimulus soon gripping the region and affecting their capital flows. Threats of conflict in Syria and the resultant rise in oil price further intensified the trading turmoil.
Moreover, a continued rise in yields is attracting investments into bonds of developed nations like the U.S. and Canada, and has certainly taken a toll on the Asia Pacific countries. Notably, India, Indonesia and Thailand have been the worst hit thanks to sluggish currencies, current account deficits and inflationary worries (read: 3 Currency ETFs Crushed in Emerging Market Rout).
However, the bearish trends in the Asia Pacific are unlikely to continue in the long term as many countries in the region are stabilizing or showing improvements of late. Plus, with the U.S. facing troubles of its own—thanks to a dysfunctional government—some are beginning to look back abroad for exposure once more.
With Indonesia’s central bank stepping in to support the rupiah and hopefully restore some confidence into the nation’s financial system, it appears that the selling pressure is finally coming to an end.
Recent data suggests that China, the world's second-largest economy, is showing some signs of improvement after two years of slowdown too. Both exports and imports have picked up while manufacturing activity has strengthened to the highest level in 16 months (read: Focus on These China ETFs for Outperformance).
Malaysia looks resilient and capable of withstanding the storm in the Asia Pacific for the rest of the year. This is largely due to the strong economic fundamentals supported by a healthy balance sheet, low inflation, low unemployment, as well as recovery in both domestic and international demand.
Meanwhile, the Philippines has also shown resiliency when facing global economic turmoil. The nation manages to grow at a robust rate even with some weakness in key developed markets, and the outlook remains quite rosy. In addition, a moderating inflation level supports the growth momentum of the economy.
Moreover, as most of the Asia-Pacific nations are commodity-centric, improving global conditions would definitely aid growth in these economies going forward.
Given this optimism, a look at the top ranked ETFs in the space could be a good idea for investors in the current market uncertainty. One way to find a top ranked ETF in the space is by using the Zacks ETF Ranking system (read: Zacks ETF Rank Guide).
About the Zacks ETF Rank
A look at the top ranked emerging market ETFs can be done by using the Zacks ETF Rank. This technique provides a recommendation for the ETF in the context of our outlook of the underlying industry, sector, style box or asset class. Our proprietary methodology also takes into account the risk preferences of investors.
The aim of our model is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other ETFs with a similar level of risk.
Using this strategy, we have found one ETF – SPDR S&P Emerging Asia Pacific ETF (GMF) – in the space that has a Zacks ETF Rank of 2 or ‘Buy’ rating (see: all the Top Ranked ETFs). The details of this top fund are highlighted below:
GMF in Focus
This overlooked ETF provides broad exposure to the emerging economies of the Asia-Pacific by tracking the S&P Asia Pacific Emerging BMI Index.
The product holds a large basket of 351 stocks and is tilted towards large cap securities, which account for 80% of assets. The ETF puts nearly 21% in the top 10 holdings, eliminating company-specific risk and prevents heavy concentration.
Taiwan Semiconductor Manufacturing, China Mobile Limited and China Construction Bank Corporation occupy the top three positions. These have a decent Zacks Rank and collectively make up for nearly 9% of total assets in the basket. Other securities do not account for more than 2.02% of assets.
In terms of sectors, financials take the top spot at roughly one-fourth of the total, while information technology makes up just less than one-fourth of the total (read: 3 Surging Financial ETFs Beating the Market).
From a country look, Chinese firms dominate the portfolio at 38.88%, followed by Taiwan (27.27%) and India (13.59%). Other countries such as Malaysia, Thailand, Indonesia and Philippines get single-digit exposure.
The fund has amassed $375.5 million in its asset base and trades in average daily volume of more than 56,000 shares a day. This suggests that investors have to pay an additional cost in the form of a wide bid/ask spread beyond the expense ratio of 0.59%.
Like many of its emerging counterparts, GMF has also been under pressure this year, losing over 4%. However, the ETF is up 4.8% over the trailing one-year period and pays a decent dividend yield of 2.45% annually, while its short term gain stands at 0.37% for the trailing one month period (read: Two Asia Pacific ETFs Avoiding The Crash).
This ETF has clearly outpaced the ultra-popular broad emerging market funds like VWO and EEM by wide margins both year-to-date and in the trailing one-year period (see: all the Emerging Asia Pacific ETFs here).
Amid the gloomy outlook, this Asia Pacific ETF could be an interesting choice for investors who still want to bet on the beaten down emerging markets. The product is poised to outperform its counterparts at least over the next one-year period.
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