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3 Emerging Market ETFs to Buy On the Dip

Zacks Equity Research

After a summer rally, emerging market stocks have been struggling lately on concerns over slower-than-expected growth, escalating geo-political tensions, a surge in the U.S. dollar and chances of higher interest rates in the U.S.

These worries have led to huge outflows from emerging market equities in the past few weeks. In fact, iShares MSCI Emerging Markets ETF (EEM), the second-largest emerging markets ETF by AUM, has lost more than $3 billion in the past three weeks, as per etf.com.

Further, most of the emerging market currencies are trading at multi-month lows against the rising dollar, with Russia being the biggest laggard. The Russian ruble has plunged more than 15% against the greenback this year (read: Emerging Market ETFs in Trouble on Stronger Dollar?).

Most of the market experts fear that the escalating tensions in Russia and their erratic policy are expected to hamper the country’s economic growth. Also, slow growth in China played its part in causing outflows from emerging market stocks. In fact, the International Monetary Fund (:IMF) now has a less optimistic growth outlook for several emerging markets.

Apart from this, rising protests in Hong Kong in the last few weeks have caused Hong Kong stocks to incur their biggest monthly fall in more than two years last month.

Buy the Dip

In spite of the recent sluggishness, emerging market equities still have great potential and represent a long-term opportunity. This is especially true given the fact that emerging markets are still quite reasonably priced on the valuation front as compared to the developed markets. Also, the recent positive election outcomes in some important emerging market countries are expected to bring in structural reforms and in turn boost their economies.

Moreover, the slowdown concerns in China notwithstanding, it is still growing at a pretty decent pace. In fact, most of the emerging markets are expected to grow faster than the U.S. The IMF expects emerging markets to grow at 4.4% in 2014 as against 1.8% for developed economies (read: 4 Emerging Market ETFs to Consider for Q4).

Thus for investors keen to use the recent dip as an opportunity to accumulate emerging market funds, we have highlighted three ETFs that are still holding well in the year-to-date time frame. These funds have successfully weathered the ups and downs in emerging markets and are expected to continue performing well in the future too:

WisdomTree India Earnings (EPI)

India has been the top performer this year in the emerging market space mainly led by optimism over the new pro-reform, business-friendly government led by Prime Minister Narendra Modi.

Moreover, improving macroeconomic conditions and better-than-expected corporate earnings have been the key drivers in supporting the uptrend (read: India ETFs: Best of the BRICs Now?).

EPI tracks the WisdomTree India Earnings Index, measuring the performance of profitable Indian companies that are eligible to be purchased by foreign investors as of the index measurement date.

Reliance Industries, Infosys and Housing Development Finance Co. are the top three holdings of the firm with a combined allocation of 22%. Sector-wise, Financials, Energy and IT dominate the fund, each with double-digit allocation.

EPI manages an asset base of $1.9 billion and trades in good volumes of roughly 4.4 million shares. The fund has lost 6.4% in the past one month, but is still up 25% in the year-to-date frame. EPI currently carries a Zacks ETF Rank #3 or Hold rating.

iShares MSCI Philippines Investable Market Index (EPHE)

This often overlooked market could be an intriguing choice for investors seeking exposure to emerging markets. Though the World Bank has slightly lowered its growth forecast for the Philippines, its economy is expected to continue to expand through next year. Strong consumption, investments, exports and accelerating infrastructure projects are expected to be the key drivers.

The fund invests about $340 million of assets in 42 Philippine stocks. The Financials sector dominates the fund with about 37% exposure, followed by Industrials (22%) and Telecom (13.9%).

As far as individual stocks are concerned, Philippine Long Distance Telephone (11.7%), Ayala Land (9.3%) and Universal Robina Corp. (6.4%) take the top three spots with a little over more than one-fourth of fund assets.
The fund has shed 3% in the past one month but is still up 20% this year. EPHE charges 61 basis points as fees and also has a Zacks ETF Rank # 3 (read: Strong Q2 Growth Puts Philippines ETF in Focus).

Beyond BRICs ETF (BBRC)

BBRC is a nice option for investors seeking exposure beyond the BRIC (Brazil, Russia, India, China) group of nations. Instead, BBRC provides exposure to some of the well-positioned nations like Mexico, South Africa, Malaysia and Qatar.

Holding 92 securities in its basket, the fund allocates more than one-third of the assets to Financials, while Telecom and Consumer Services also have double-digit allocations.

The fund manages an asset base of $292.2 million and charges 58 basis points as expenses. BBRC has lost more than 4% in the past month and currently carries a Zacks ETF Rank #3.

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