Though the emerging market space has been the worst hit over the past one year on Fed tapering and interest rate hike concerns, it has shown tremendous strength in recent weeks. This is particularly true as investors are dumping high growth stocks like technology and biotech in favor of cheaper stocks (read: Inside the Wild Ride of Biotech ETFs).
This shift made investors put huge amounts of money in the emerging market equities and bonds that seem undervalued at current levels. In fact, emerging market ETFs have seen the biggest asset inflows in seven months with the two ultra-popular ETFs – iShares MSCI Emerging Markets ETF and Vanguard FTSE Emerging Markets ETF – accumulating nearly $2.76 billion in the first few days of April as per ETF.com.
Additionally, iShares J.P. Morgan USD Emerging Markets Bond pulled in more than $464 million assets in the same period.
Behind the Popularity
The suddenly renewed optimism was propelled by the positive developments in key emerging markets and some concerns over the U.S. economic growth, which is still showing subdued recovery.
Strong confidence arising from elections in India and Indonesia are driving up investors’ enthusiasm in these markets while Brazil and Turkey increased interest rates to curb inflation. China, the second largest economy recently took various stimulus measures to revamp growth in the economy (read: Will India ETFs Election Fever Continue?).
Further, emerging markets are expected to grow faster that the developed nations over the long term thanks to favorable demographics and rapid industrialization.
Moreover, stocks in the MSCI Emerging Markets Index are currently trading at attractive levels of 10.6 times estimated earnings for the next 12 months, according to Bloomberg. This is much below 15.2 times estimated earnings for the next 12 months for the equities of most developed economies.
3 ETFs to Consider
Given the encouraging fundamentals and abrupt change in investor sentiments, investors seeking to make profits in this space could play with emerging market ETFs. While there are several options in the space, we have highlighted three funds that have been trending higher over the past 10 trading sessions (see: all the Emerging Market ETFs here).
Any of these could be considered excellent picks as these provide diversified exposure across number of emerging economies and sectors rather than concentrated play on a particular nation or sector. Further, these have a decent Zacks ETF Rank of 3 or ‘Hold’, suggesting room for further upside in the coming days if current trends continue to persist:
PowerShares FTSE RAFI Emerging Markets Portfolio ()
This ETF follows the FTSE RAFI Emerging Markets Index, a benchmark that seeks to track the performance of the largest emerging market equities on four fundamental measures – book value, cash flow, sales and dividends. Holding 332 securities in its basket, the fund allocates higher to Gazprom with 4.55% share while other firms do not hold less than 3% of assets.
Financials (29.65%) and energy (23.72%) take the top two spots from a sector look while materials and information technology receive more than 10% share each. In terms of country holdings, the product enjoys diversification benefits with China, Brazil, Taiwan and Russia taking double-digit exposure.
The fund has amassed $371.6 million in its asset base, and trades in a good volume of more than 136,000 shares a day. It charges 49 bps in annual fees from investors and added nearly 4% in the past 10 days.
SPDR S&P Emerging Markets Dividend ETF ()
This fund provides exposure to the stocks from emerging market countries that offer high dividend yields by tracking the S&P Emerging Markets Dividend Opportunities Index. It has accumulated $482.4 million in AUM and trades in average daily volume of roughly 120,000 shares. Expense ratio came in at 0.59% (read: Guide to Emerging Markets Dividend ETFs).
In total, the fund holds 122 stocks in its basket that are widely spread across each country and security. None of the securities holds more than 3.31% of total assets while Taiwan, China and Brazil make up for the top three countries taking double-digit allocation in the portfolio.
However, the product is slightly skewed toward financials at 23%, followed by information technology (16.0%) and telecom services (15.2%). EDIV was up 3.7% over the past 10 days.
SPDR S&P Emerging Market ETF ()
This fund tracks the S&P Emerging BMI Index and holds 941 securities in its basket. Like the other two counterparts, this ETF is also spread out across various securities as each holds less than 2.24% of assets.
Here again, financials make up for the top position with one-fourth share in terms of sector while information technology and energy round off to the next two. Chinese firms dominate the fund’s portfolio at nearly 23.16%, closely followed by Taiwan (14.52%) and Brazil (12.05%).
The fund has been able to manage $194.8 million in its asset base and charges 59 bps in annual fees and expenses. Volume is light as it trades in about 26,000 shares a day on average. The ETF gained 3.6% in the past 10 trading sessions (read: 3 Emerging Market ETFs Off to a Great Start in 2014).
Investors should note that the three products have been clearly outpacing VWO and EEM by a wide margin in the same period. This trend is likely to continue at least for the near term given that the domestic growth still looks soft and investors continue to recycle their exposure from expensive valuation stocks to cheaper ones.
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