The emerging markets regained their sheen as the Fed cut the U.S. economic growth forecasts for this year and the next. Even after the Fed removed its ‘patient’ stance on the rate hiking issue, a depressed inflationary backdrop held it back from taking this key decision. Further, the apex bank seeks more stabilization in the labor market.
All these translated into a strong possibility of a delayed rate hike which in turn weighed on the greenback. Market experts see the timeline of the first Fed rate hike after 2006 being deferred and expect Q2 of 2015 to be another quarter of easy money in the U.S. This pushed up the emerging markets space as EM equities found a reason to rejoice.
This is especially true as the ultra-popular Vanguard FTSE Emerging Markets ETF (VWO - Free Report) has gained nearly 2.5% in the last ten trading sessions (as of March 27, 2015) and the Emerging Markets Equity Income Fund (DEM) has added about 2.8% during the same frame suggesting investors’ hunger for higher yields. On the other hand, SPDR S&P 500 ETF (SPY - Free Report) has added about 0.4% (as of March 27, 2015).
Emerging markets have long been investors’ favorites due to their high growth potential, rapid pace of industrialization and urbanization as well as high interest rates. However, given the apprehensions of Fed tightening, emerging market currencies were badly hurt on a stronger dollar and commodity weakness. Now that the scenario might change in the coming quarter, the emerging market space could be a bright spot to play.
Per Nomura, a further ascent in the greenback will hurt U.S. exports and leave an adverse impact on the overall GDP. This in turn will hold back the Fed from tightening, “‘which has potential to stall the dollar rally.”
Nomura also added that “EM growth expectations are now so low that the potential for upside surprises is bigger.” The favorable trend will be more pronounced for the energy importing countries. Nomura further noted that “hard currency EM debts are generally manageable at the country level.” Per the research house, despite the slowdown of hard currency debt issuances, each country has not seen the same degree of deceleration (read: Emerging Market ETFs in Trouble on Stronger Dollar?).
All these point toward lesser turbulence, and probably a rally in the emerging market space in the upcoming quarter. While the broad emerging market space has rewarded handsome returns after the Fed meet in March, some specific products could be taken into consideration in Q2. Let’s take a look at the three top performing (lately) broad emerging market ETFs (read: 4 Buy Ranked Emerging Markets ETFs in Focus).
MSCI Emerging Markets Quality Dividend ETF
The $4.8 million product tracks the MSCI Emerging Markets High Dividend Yield Index giving exposure to a basket of high yield stocks domiciled in emerging markets. The product looks to hold about 158 stocks with this approach. China (36.7%), South Africa (13.9%), Taiwan (11.3%) and Russia (9.9%) are some of the countries getting increased exposure.
QDEM was up 3.9% in the last ten trading sessions (as of March 27, 2015) and yields about 4.18% in annual dividend. The fund has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
SPDR MSCI Emerging Markets Quality Mix ETF (QEMM - Free Report)
This fund follows the MSCI Emerging Markets Quality Mix Index, holding a large basket of 605 stocks. It has amassed $73.8 million and charges a low fee of 30 bps per annum. The fund provides higher diversification benefits and is well spread out across various components.
Each firm holds less than 4% of assets. Further, the top sector – financials – account for 24.5% of assets while information technology (21.5%), telecom (10.5%) and consumer staples (9.8%) make up for a nice mix. The fund charges 30 bps in fees. The fund was up 3.7% in the last ten trading sessions (as of March 27, 2015). The fund has a Zacks ETF Rank #3 (Hold).
SPDR MSCI EM 50 ETF (EMFT)
This fund has amassed about $2.3 million in assets. It is tilted toward China (34%), South Korea (19.73%) and Taiwan (15.11%). As far as sector diversification is concerned, the fund is tilted toward Information Technology (31.52%) and Financials (30.18%). The fund gained about 2.2% in the last ten trading sessions (as of March 27, 2015).
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