Emerging Market ETFs Outperforming on China Rally

Emerging market ETFs are hanging in much better than the S&P 500 since the pullback that began in September thanks in part to surprising strength in Chinese stocks.

For the month ended Nov. 7, iShares MSCI Emerging Markets (EEM) was down 1.2% compared with a loss of 4.4% for SPDR S&P 500 (SPY), according to Morningstar.

For the trailing three months, the emerging market ETF is up about 3% while the S&P 500 fund is flat. China is the largest single country in EEM at about 18% of the portfolio.

China is helping buoy the developing market ETF. For example, iShares FTSE China 25 (FXI) is up more than 5% the past four weeks. Since the end of September, the China fund has pulled in more than $1 billion and is the third best-selling ETF, according to IndexUniverse data. [BRIC ETFs: Investors Jump Into China and Brazil]

Meanwhile, Guggenheim China Small Cap (HAO) is the second-best performing ETF for the trailing month. [ETF Spotlight: Chinese Small-Caps]

FXI soared to a six-month high this week as better-than-expected corporate earnings bolstered the outlook for Asia’s largest economy, Bloomberg News reports. “The positive earnings season is helping Chinese U.S.-traded stocks to their fourth straight month of gains, with data from manufacturing to retail sales bolstering China’s outlook after the economy’s seven-quarter slowdown,” it said.

“China has been a relative laggard compared with the broader emerging markets indices for much of 2012, but the country’s equity market has all of a sudden caught a bid in recent weeks and is making a significant move,” says Paul Weisbruch at Street One Financial. [ETF Chart of the Day: China]

EEM, the emerging market ETF, has suffered a two-day slide in the wake of President Barack Obama’s election victory. Investors are worried about the U.S. fiscal cliff and the lingering European debt crisis.

Still, Obama’s re-election can support emerging market stocks on prospects he is more likely than challenger Mitt Romney to maintain asset purchases designed to bolster the U.S. economy, said Michael Ganske, head of emerging market research at Commerzbank, in a separate Bloomberg report.

“A clear-cut win for Obama is good news,” Ganske told Bloomberg. “The political agenda of Romney had some question marks, such as naming China a currency manipulator and the continuation of QE3.”

iShares MSCI Emerging Markets

Full disclosure: Tom Lydon’s clients own EEM and SPY.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.