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It's All About Growth For Emerging Markets ETFs

ETF Professor

The premise is simple: in order for emerging markets stocks and related exchange traded funds to build on the impressive returns delivered in 2017, economic growth is essential. With the MSCI Emerging Markets Index up about 8 percent this year and several emerging markets ETFs adding assets at feverish paces, it appears investors are comfortable betting on economic growth in the developing world.

Improving economic fundamentals are essential to the bull thesis for emerging markets stocks and ETFs, as one of the previous catalysts for the asset class — valuation — is evaporating.

“Today, like most asset classes, EM stocks cannot really be described as cheap,” said BlackRock in a recent note. “They are trading close to their historical norm, both on an absolute basis and relative to developed markets; the MSCI Emerging Market Index is currently trading at about a 25-percent discount to developed markets, in line with the long-term and post-crisis average.”

Packing On Assets

Among other emerging markets ETFs, the iShares Core MSCI Emerging Markets ETF (NYSE: IEMG) remains a favorite with investors. Year-to-date, investors have added nearly $3 billion in new assets to IEMG, a tally exceeded by just two other ETFs. IEMG added $16.57 billion in new capital last year, making it 2017's fourth-best ETF in asset-gathering proficiency.

IEMG, which is barely more than 5 years old and already has almost $50 billion in assets, tracks the MSCI Emerging Markets Investable Market Index. The ETF holds over 1,900 stocks and allocates almost 29 percent of its weight to China. South Korea and Taiwan combine for 26.7 percent of IEMG's geographic exposure. India and Brazil combine for 16 percent.

IEMG allocates over a quarter of its weight to technology stocks and nearly 22 percent to the financial services sector. Consumer discretionary and materials names combine for over 18 percent.

What To Watch For

Industrial metals prices can provide clues regarding investors' sentiment toward emerging markets equities.

“Looking at quarterly data, since 1990 every one percentage point rise in industrial commodity prices (using the JOC Industrial Metals Index) has translated into roughly 0.30-percent outperformance by emerging markets,” said BlackRock. “Put differently, in quarters when industrial metal prices rose, emerging market equities outperformed developed markets by roughly 3.5 percent on average. Conversely, during quarters when industrial metal prices were declining, emerging markets underperformed by approximately 2.5 percent.”

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