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Are Emerging Markets a Buy? ETFs in Focus

Zacks Equity Research

The week started on a great note for the emerging economies as traders took cue from the rate cut in China’s. People’s Bank of China (PBOC), cut the reserve requirement ratio (RRR) by 100 bps or 1 percentage point in the last week to reignite growth in the world’s second-largest economy (read: ETFs in Focus on China Rate Cut).

On Jan 7, the Indonesian rupiah registered its biggest gain since 2015, helping the MSCI Emerging Markets Currency Index rise to its highest level since July 2018. The index has now risen in eight of the past 10 weeks (as of Jan 4).

Emerging market equities and ETFs struggled in 2018. MSCI Emerging Markets Index plunged more than 15% last year. However, EM equities have started 2019 on a strong footing with gains of more than 2% in the first trading week of the year. Post the recent market bloodbath in the equities market, bargain hunters will look to park their investment in the beaten down emerging market assets.

Rate hikes from the Fed were largely blamed for the poor performances of emerging market assets in 2018.  However, the apparently dovish stance from the Fed in the latest FOMC meeting has resulted in speculation that the three-year rate hiking cycle could possibly halt in 2019 (read: Risk-On Trade is Back: ETFs That Gained the Most).

On average, the bear market has lasted for 220 days in emerging markets, per Ned Davis Research. With emerging markets having been in the bear market territory since September 2018, it’s about time that these markets exit the bear territory, going by the data.

Bank of America’s Bull & Bear Indicator, a gauge which signaled investors to sell right before the emerging markets plunged a year ago, gave a buy sign last week, its first since the Brexit vote in June 2016. Also, Citigroup Inc has upgraded developing nation shares, calling them its “preferred value play.” Further, Blackrock sees these assets at attractive valuations.

ETFs in Focus

A positive breakthrough in the trade talks between Washington and Beijing could bode well for the attractively valued emerging market assets. Against this backdrop, we highlight the five most popular emerging market ETFs. These have been performing well over the past four weeks (as of Jan 8) (see: all the Broad Emerging Market ETFs here):

Vanguard FTSE Emerging Markets ETF VWO

The fund tracks the FTSE Emerging Index and comprises 4686 holdings. Country wise, China (34.7%), Taiwan (14.1%) and India (11.7%) have double-digit exposure each. AUM is $56.3 billion and expense ratio is 0.14%. It has returned 2.3% over the past four weeks. The fund carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

iShares Core MSCI Emerging Markets ETF IEMG

The fund tracks the MSCI Emerging Markets Investable Market Index. There are 1836 holdings in the basket. The countries with double-digit exposure are China (28.0%), South Korea (13.8%), Taiwan (11.6%) and India (10.0%). AUM is $50 billion and expense ratio is 0.14%. It has returned 2% over the past four weeks. The fund carries a Zacks ETF Rank #3 with a Medium risk outlook (read: ETFs to Benefit & Lose From a Strengthening Dollar).

iShares MSCI Emerging Markets ETF EEM

The fund tracks the MSCI Emerging Markets Index and comprises 952 holdings. China (30.1%), South Korea (13.5%) and Taiwan (10.9%) have double-digit exposure. AUM is $29.9 billion and expense ratio is 0.67%. It has returned 1.9% over the past four weeks. The fund carries a Zacks ETF Rank #3 with a Medium risk outlook.

Schwab Emerging Markets Equity ETF SCHE

The fund tracks the FTSE All Emerging Index. There are 988 holdings in the basket. China (34.1%), Taiwan (14.1%) and India (11.1%) are countries with double-digit exposure each. AUM is $4.9 billion and expense ratio is 0.13%. It has returned 2.4% over the past four weeks. The fund carries a Zacks ETF Rank #3 with a Medium risk outlook (read: Emerging Market ETFs Pop on U.S.-Sino Trade Talks, Rate Hikes)

WisdomTree Emerging Markets Equity Income Fund DEM

The fund tracks the WisdomTree Emerging Markets Equity income Index. There are 469 holdings in the basket. Countries with double-digit exposure are Taiwan (25.0%), China (21.3 %%) and Russia (16.3%). AUM is $2 billion and expense ratio is 0.63%. It has returned 2.1% over the past four weeks. The fund carries a Zacks ETF Rank #3 with a Medium risk outlook.

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