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Emerging Market Currencies Falling: These ETFs Are Still Hot

Zacks Equity Research
Mutual Fund Report for TRMCX

The MSCI Emerging Markets Currency Index — a basket of currencies that tracks the country allocations in the emerging market (EM) index — is down nearly 9% from this year’s high on Apr 3. However, the slide has not taken the sheen away from the emerging market ETFs (see all Broad Emerging Market ETFs).

This is especially true as iShares Core MSCI Emerging Markets ETF IEMG has pulled in $10.7 billion so far this year, though some of these were outflows out of the more expensive iShares MSCI Emerging Markets ETF(EEM) which tracks the same index.

SPDR Portfolio Emerging Markets ETF SPEM, Schwab Emerging Markets Equity ETF SCHE, First Trust Emerging Markets AlphaDEX Fund FEM and Schwab Fundamental Emerging Markets Large Company Index ETF FNDE have year-to-date inflows of $651.41 million, $571.94, $160.67 million and $412.99, respectively.

The strong asset accumulation was credited to cheap valuations as well as strong growth prospects.

As per portfolio specialist at T. Rowe Price, emerging market valuations based on the 2019 price-to-earnings ratio have fallen to discount levels when compared to their historical averages and relative to developed markets. According to him, there is scope for investment in the private banks of Brazil and India, insurance companies of South Africa and China as well as equities of Internet and financial holdings in Russia.

However, the emerging markets are fraught with issues like poor political and economic leadership, institutional weaknesses, reliance on commodity exports, inadequate current account gaps, trade deficit, weak banking sector and budget deficits (read: IInverse EM ETFs to Gain as Currency Turmoil Deepens).

In general, emerging market ETFs are really exposed to sentiments. The investors are mostly foreign to the domestic state of affairs and with all the trade tensions doing rounds, the views may not be very optimistic.

According to a survey conducted by Fitch, countries like India and Indonesia have sufficient buffers and adequate policies in place to weather the EM rout. The broader sell-off is quite evident in the markets but it is going to be normal again mostly in the Asian EM’s apart from Pakistan. The survey results showed that 43% of the respondents would likely hold their position in the ongoing turmoil, 30% would cut their exposures and the remaining 26% believed that the sell-off has gone too far and presents a buying opportunity (read: India ETFs: Proof to EM Shocks, What About Oil Shocks?).

The issue is the impatience on the side of investors. Morningstar calculated investor returns for 68 mutual funds that had invested in EM stocks over the past 15 years, including the various asset classes. The average fund returned 9.2% annually, including dividends. The shocking part of it was that the average investor was only able to earn 6.5%. 

The emerging markets pose some great opportunities to technology investments. It has been observed that the developing countries often accelerate much faster in trying out new technology than the developed countries. As an example, some of the countries in Africa were quick to embrace mobile payment systems without ever having brick-and-mortar bank branches. The EMs are now automating factory operations. Their demand accounts for a quarter of the world’s industrial robotics demands.

Let us take a quick look on ETFs mentioned above, each carrying a Zacks ETF Rank #3 (Hold).


It tracks the MSCI Emerging Markets Investable Market Index. There are 1903 holdings in the basket. The countries with double-digit exposure are China (28.96%), South Korea (15.4%), Taiwan (13.4%) and India (10.05%). AUM is $47.53 billion and expense ratio is 0.14%.


It tracks the FTSE All Emerging Index. There are 975 holdings in the basket. China (35.67%), Taiwan (12.81%) and India (11.3%) are the countries with double-digit exposure. AUM is $4.74 billion and expense ratio is 0.13%.


This fund tracks the Russell Fundamental Emerging Markets Large Company Index. There are 356 holdings in the basket. Countries with double-digit exposure are China (20.61%), South Korea (19.27%), Russia (14%) and Taiwan (12.45%). AUM is $2.12 billion and expense ratio is 0.39%.


It tracks the S&P Emerging BMI Index. There are 3088 holdings in the basket. The countries with double-digit exposures are China (32.08%), Taiwan (15.09%) and India (13.75%). AUM is $1.46 billion and expense ratio is 0.11%.


It tracks the Defined Emerging Markets Index. There are 150 holdings in the basket. The countries with double-digit exposure are China (38.2%) and Russia (12.35%). AUM is $525.1 million and expense ratio is 0.80%.

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