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A Return to Emerging Market ETFs

While developed markets languished, investors turned to emerging markets and related exchange traded funds for a cheaper play on global markets.

Emerging equities are outperforming developed markets. Year-to-date, the iShares MSCI Emerging Markets ETF (EEM) rose 1.1% and the Vanguard FTSE Emerging Markets ETF (VWO) increased 1.6%, whereas the e SPDR S&P 500 ETF (SPY) dipped 1.8%.

According to the Institute of International Finance, investors funneled $18 billion into emerging market stocks and bonds over January, reports Carolyn Cui for the Wall Street Journal.

While EEM and VWO experienced heavy outflows, some areas drew heavy inflows. For instance, the iShares MSCI India ET (INDA) added $617.2 million in assets, iShares MSCI Taiwan ETF (EWT) saw $172.0 million in inflows and the Market Vectors Emerging Markets Local Currency Bond ETF (EMLC) experienced $148.4 million in inflows, according to ETF.com data. [Shrinkage for a Popular Emerging Markets ETF]

As the developed markets stumbled at the start of the new year, investors turned to other global opportunities that could generate improved returns, following the rally in developed-market equities and fixed-income assets last year.

“Emerging markets are one of the few bargains out there in an increasingly expensive world,” Jeffrey Kleintop, chief global investment strategist at Charles Schwab Corp., said in the article, arguing that the low valuations could provide “some sort of buffer” when volatility spikes.

For instance, EEM shows a price-to-earnings ratio of 12.1 and a price-to-book of 1.5, VWO has a 12.3 P/E and a 1.6 P/B. In contrast, SPY shows a 17.3 P/E and a 2.5 P/B.

The cheap raw materials and commodities prices will help fuel emerging market growth at a faster pace than developed economies. For example, India is well-positioned to benefit from cheap oil prices as the country is a prominent energy importer. [Falling Commodity Prices a Boon for Some EM ETFs]

Meanwhile, countries like Taiwan can benefit from the U.S. recovery as the island country is the 12th largest goods trading partner with the U.S. as of 2013 data.

Moreover, the added global liquidity, with the European Central Bank adopting a €1 trillion, or $1.3 trillion, quantitative easing program, could push investors toward emerging markets to chase after higher returns. [ECB Stimulus to Fuel Emerging Market ETFs]

Investors who are concerned about the continued strength in the U.S. dollar and its effect on emerging market exposure can also consider the recently launched iShares Currency Hedged MSCI Emerging Markets ETF (HEEM) and the Deutsche X-trackers MSCI Emerging Markets Hedged Equity Fund (DBEM) , which is three years old, to track developing markets while hedging against forex risks.

For more information on the developing economies, visit our emerging markets category.

Max Chen contributed to this article. Tom Lydon’s clients own shares of EEM and SPY.

The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.