This article was originally published on ETFTrends.com.
The U.S. stock market has been the default play for investors even as the bull market enters into the latter stages of its market cycle, but when the well runs dry, it could be emerging markets and small capitalization opportunities receiving the lion's share of investor capital.
Emerging markets have been marred by the trade wars between the U.S and China, causing a negative ripple effect into emerging market ETFs, such as the Vanguard FTSE Emerging Markets ETF (VWO) --down 7.67% YTD, iShares Core MSCI Emerging Markets ETF (IEMG) --down 7.3% YTD and iShares MSCI Emerging Markets ETF (EEM) --down 7.78% YTD.
"It's all been about trade wars," said ETF Trends Publisher Tom Lydon said during "Countdown to the Closing Bell" on Fox Business Network on Friday. "All this conversation continues to pound emerging markets."
While the majority of investors might be driven away by the red prices in emerging markets, they should be looked at as being substantial markdowns, espcially if trade negotiations between the U.S. and China result into something materially positive.
"If we do see some positive talks--even if it's just a little discussion, they'll pop up two or three percent in a given day so the idea here is look at valuations," added Lydon. "Emerging markets in some areas have P/Es (price-to-earnings ratios) of nine compared to 18 for the S&P, so you can buy those stocks half off and through ETFs, there's a great opportunity to do it."
With respect to value compared to price, many of these ETFs from abroad present a profitable opportunity that can be realized, especially if China and the U.S. ameliorate their trade differences. It presents an interesting opportunity for the investor who is seeking value in terms of locating discounted assets.
"If you're a value investor, number one, going to value--that makes a lot of sense," said Lydon. "Number two, if you feel a lot of this is Trump's posturing, which many people do, you have to believe at one point in time, they're going to give a little, and when they do, it's going to be the emerging markets who benefit the most."
Lydon suggests looking at the WisdomTree Emerging Markets High Div ETF (DEM) , which seeks to track the price and yield performance of the WisdomTree Emerging Markets High Dividend Index. The index is a fundamentally weighted index that is comprised of the highest dividend-yielding common stocks selected from the WisdomTree Emerging Markets Dividend Index.
Big Opportunities in Small Caps
The extended bull market has been marked by the growth of FANG stocks like Amazon and Facebook being in pole position for much of the run, but this year has a also seen a rise in small cap equities as evidenced in the upward trajectory of the Russell 2000. Spurred by tax cuts that have been a boon to corporate profits and unlike emerging markets, immunity to changes in the dollar, small cap ETFs have been benefitting.
"Small cap companies are doing so much better because they don't have to worry about the dollar, they don't have to worry about trade and the tax cuts have been a huge benefit to them," Lydon said.
Lydon recommends the Janus Henderson Small Cap Gr Alpha ETF (JSML) , which seeks investment results that correspond generally to the Janus Small Cap Growth Alpha Index. The underlying index is composed of common stocks of small-sized companies that are included in the Solactive Small Cap Index, a universe of 2,000 small-sized capitalization stocks.
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