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Top Turnaround Funds in Emerging Markets

An old adage says that when the United States sneezes, the rest of the world catches a cold. Recently, though, as the United States slows modestly, emerging market stocks seem to have caught something more like pneumonia, observes George Putnam, editor of The Turnaround Letter.

While not at Baron Rothschild’s 18th century “buy when there is blood in the streets” level, sentiment toward emerging market equities is definitely depressed. Not only have the stocks been  weak, but valuations are modest at 11.9x for one of the major indices. We think these markets are worth a closer look.

More from George Putnam: Top Picks 2019: Newell Brands and Midstates Petroleum (NWL) (MPO)

Investing directly into emerging market companies is not a familiar exercise for most investors (including us), and so we recommend investors consider diversified exchange traded funds (ETFs).

For more aggressive investors, regional or country-specific ETFs or mutual funds (both open-end and closed end)can offer appeal. Investors should be aware that emerging mar-ket investments tend to be more volatile than developed market equities.

Listed below are four ETFs and two closed-end mutual funds that offer investors exposure to emerging market securities. Subscribers may also want to explore the numerous other related ETFs and mutual funds.

iShares MSCI Emerging Markets (EEM)

Often considered the go-to vehicle for emerging market equities, this $29 billion in assets ETF includes over 800 large and mid-sized companies in nearly 25 countries. Investors should be aware of the high expense ratio (0.68%) and concentration in China (31%), including Tencent at 4.4% weight.

See also: Manias, Groupthink and the Absence of Fear

Vanguard FTSE Emerging Markets ETF (VWO)

Some investors prefer this over the EEM given its lower expense ratio (0.14%) and larger $74 billion (assets) size. Its performance closely matches the EEM although it holds over 4,640 stocks. Like the EEM, it has a high con-centration in Chinese companies (34%), with its top ten holdings comprising about 19% of its portfolio, including a 4% position in Tencent.

SPDR S&P Emerging Asia Pacific ETF (GMF)

This ETF offers a way for investors to focus on China and other Asia Pacific equities. Its high 45% weight in Chinese stocks has weakened its year-to-date performance, down over 15%, yet offers the potential for sharp gains should the concerns lessen. Its highest company-specific exposure is 6.1% (Tencent Holdings), and it holds over 760 equities. Its expense ratio is a reasonable 0.49%.

India Fund (IFN)

With $620 million in as-sets, the closed-end India Fund is actively man-aged by the respected Aberdeen Standard In-vestments. Like most closed-end funds, it trades at a discount (about 13.5%) to its net asset value. While its expense ratio of 1.26% is high compared to ETFs, it offers the potential to benefit from better company-specific holdings and a general return to favor of Indian companies if oil prices stay weak.

Mexico Fund (MXF)

Founded in 1981, the Mexico Fund is one of the longest-running closed-end funds on the market. It holds a fairly concentrated portfolio of 27 Mexican equities, although it is diversified across a broad range of industries. The fund trades at a 13.5% discount to its net asset value, and carries a 1.62% expense ratio.

iShares J.P. Morgan USD Emerging Markts Bond ETF (EMB)

One of the largest emerging market bond funds at nearly $15 billion, the EMB fund holds 420 government and agency bonds from dozens of countries. Most of its holdings mature in more than five years, offering higher yields (5.1%) yet al-so increasing its sensitivity to changing interest rates and credit quality. Its expense ratio is a reasonable 0.40%.

Disclosure Note: An affiliate of the Publisher owns some of the funds discussed in this article.