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Brazil, China Fail to Snap EM ETFs Rally

Sweta Killa

After many years of underperformance, emerging market stocks are on a stellar ride and outperforming the broad market indices this year. This is especially true as the MSCI Emerging Markets Index is up 17.8% in the year-to-date timeframe compared with gains of 7.9% for the S&P 500 and 10.20% for the MSCI World Index (read: Can Emerging Market ETFs Retain Their Mojo in 2017?).

The rally was driven by improving economic growth in many parts of the developing world, a pickup in manufacturing activity, a rebound in commodity prices, better current accounts, better-than-expected earnings, sector specific reforms, and growth policies. Additionally, the cautious stance of the Fed for future rate hikes continues to instill confidence in the emerging markets. A weaker greenback and threats of political uncertainty in the U.S. have added to the strength.  

If these aren’t enough, low valuations have made these stocks tempting as the MSCI Emerging Markets Index is currently trading at 15.2 times its past 12 months' earnings versus 22.3 times earnings for the Standard and Poor's 500 stock index.

However, negative sentiment has built up in the space with a flurry of bad news lately. Among the most notable was the presidential corruption scandal in Brazil that led to a bloodbath in Brazilian stocks on May 18. The Brazilian stocks tumbled 8.7%, marking the biggest one-day drop since the 2008 financial crisis. The political unrest has raised speculation of a Brazil downgrade in the coming months (read: Should You Buy Brazil ETFs After Brutal Sell-Off?).

Another reason was the China credit rating downgrade on May 24. Moody’s cut the rating of the world's second-largest economy to A1, citing slowing growth and rising debt. The cut is the first in nearly three decades and sent shivers through emerging markets.

While the latest bout of events has hit emerging market stocks, they have been unable to dull their appeal and the bullish outlook remains intact. In particular, Vanguard FTSE Emerging Markets ETF VWO has gathered nearly $401 million in its assets post Brazil turmoil, per etf.com.

Given this, while many emerging market ETFs have performed remarkably well this year, we highlight five funds that are leading the space and are expected to continue their outperformance if the same trend prevails.

Emerging Markets Internet & Ecommerce ETF EMQQ

This ETF targets the Internet and ecommerce sectors of the developing world by tracking the Emerging Markets Internet & Ecommerce Index. Holding 41 securities in the basket, it is concentrated on the top firms with Tencent Holdings, Naspers and Alibaba (BABA) collectively make up for 23.5% share. Chinese firms account for the lion’s share at 61% while South Korea, Russia and South Africa make up for a decent exposure. The product has accumulated $89.3 million in its asset base and charges 86 bps in annual fees. It has surged 43.6% so far this year and has a Zacks ETF Rank of 3 or ‘Hold’ rating (read: EMQQ -- How This Little-Known ETF Beat Amazon).

PowerShares Golden Dragon China Portfolio PGJ

This ETF targets the Chinese equity market but is quite unpopular with AUM of $174.8 million. It tracks the Nasdaq Golden Dragon China Index while charges 70 bps in fees and expenses. Holding 61 stocks in the basket, the fund is heavily concentrated on the top firms with New Oriental Education & Technology Group, JD.com and Ctrip.com accounting for at least 8% share each. Further, about 44.8% of the portfolio is allocated to information technology, followed by consumer discretionary (38.7%). PGJ has gained 36.8% in the year-to-date timeframe and has a Zacks ETF Rank of 2 or ‘Buy’ rating.

VanEck Vectors Poland ETF PLND

This product targets the Polish stock market by tracking the MVIS Poland Index. It holds 27 stocks with a concentrated exposure in Polski Koncern Naftowy and Powszechna Kasa Oszczednosci Bank with over 8% share each. About 42% of the portfolio is dominated by financials while energy, materials and consumer discretionary also get double-digit exposure each. The product has amassed $17.1 million in AUM and charges 60 bps in annual fees. It has gained 36.2% since the start of the year and has a Zacks ETF Rank of 3.

VanEck Vectors India Small-Cap Index ETF SCIF

This fund targets the small cap segment of the Indian equity market and tracks the MVIS India Small-Cap Index. In total, it holds 168 securities in its basket with none making up for more than 2.32% of assets. SCIF is also well spread across various sectors with industrials, consumer discretionary, financials and materials making up for a double-digit exposure each. The fund has so far amassed $303.5 million in its asset base while charging 78 bps in annual fees. The ETF has gained 34.1% in the year-to-date timeframe and has a Zacks ETF Rank of 2 (read: India ETFs: More Run Ahead?).

iShares MSCI Turkey ETF TUR

This product provides a pure play exposure to 69 Turkish stocks by tracking the MSCI Turkey Investable Market Index. It is highly concentrated on the top two firms with a combined 20.8% of assets while other firms hold no more than 6.38% share in the basket. Here, financials is the top sector with a 40.4% allocation while industrials and consumer staples round of the next two spots with a double-digit exposure each. The fund has amassed around $394.1 million in its asset base and charges 64 bps in annual fees from investors. TUR is up 24.8% in the year-to-date timeframe and has a Zacks ETF Rank of 4 or ‘Sell’ rating.

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