While gold, no doubt, has been garnering investor attention post Fed meeting, emerging markets have been outperforming in the stock world. This is especially true as the most popular ETF – iShares MSCI Emerging Markets ETF (EEM - ETF report) – hit a 52-week high of $38.32 on Thursday after the Fed kept the key interest rates on hold. This represents an about 18% increase from a year-to-date look compared with gains of 7.3% for iShares MSCI ACWI ETF ACWI) and 7.6% for SPDR S&P 500 (SPY - ETF report) , suggesting that emerging markets are overlooked winners this year (read: Fed's No Rate-Hike Decision Boosts These Gold ETFs).
The outperformance this year has come on the back of low interest rate policies by central banks and a weaker U.S. dollar that rekindled demand for riskier assets. However, rate hike concerns have spoilt the mood now and then.
The bullish trend is expected to persist for the rest of the year given that the Fed hinted at more gradual rate hikes over the next few years, with just two lift-offs in 2017 and three each in 2018 and 2019. This would weigh on the dollar, pulling in more capital into the emerging markets. In fact, the WSJ Dollar Index has weakened nearly 4% so far this year. Further, stabilizing oil and commodity prices, a rebound in currencies as well as global easing policies would drive emerging market stocks higher in the coming months.
Apart from these, emerging market & developing economies are expected to grow 4.1% this year and 4.6% for the next, as per International Monetary Fund. This is much higher than growth of 1.8% each in 2016 and 2017 for developed economies and 3.1% and 3.4%, respectively, for global economies.
All this optimism raised the appeal for emerging markets ETFs, pushing most of the funds to fresh highs last week. Below, we have highlighted five funds that have the potential to move higher in the coming months given that these have a favorable Zacks Rank of 1 (Strong Buy), 2 (Buy) or 3 (Hold) (read: 4 Emerging Markets ETFs Gain Traction on High Inflows).
SPDR S&P Emerging Markets ETF (GMM - ETF report)
This fund tracks the S&P Emerging BMI Index and is a home to 1282 securities with none holding more than 3.6% of assets. From a sector look, financials make up for the top position with one-fourth share while information technology and consumer discretionary round off to the next two spots. Chinese firms dominate the fund’s portfolio at nearly 30.5%, closely followed by Taiwan (14.1%) and India (11.9%). The fund has been able to manage $239.5 million in its asset base and charges 59 bps in annual fees. Volume is light as it trades in about 35,000 shares a day on average. The ETF hit 52-week high of $62.31 per share in Thursday’s trading session, representing a gain of about 18.2% in the year-to-date timeframe. It has a Zacks ETF Rank of 3 with a Medium risk outlook.
iShares Core MSCI Emerging Markets ETF (IEMG - ETF report)
This ETF follows the MSCI Emerging Markets Investable Market Index and offers diversified exposure to 1,942 securities with each holding less than 3.3% share. Financials (25.1%) and information technology (21.9%) are the top two sectors, followed by consumer discretionary (11.5%). In terms of country holdings, about one-fourth of the portfolio goes to Chinese firms while South Korea and Taiwan round off the next two spots with a double-digit exposure each. IEMG is one of the popular ETFs in the emerging market space with AUM of $17.2 billion and average daily volume of more than 6 million shares. It charges 16 bps in annual fees from investors and has a Zacks ETF Rank of 2 with a Medium risk outlook. The ETF has gained 17% so far this year and hit a 52-week high of $46.54 per share in Thursday’s trading session (read: 5 Reasons Why Emerging Market ETFs Are Still a Buy).
Schwab Emerging Markets Equity ETF (SCHE - ETF report)
This fund tracks the FTSE Emerging Index, holding 843 stocks in its basket. None of the securities accounts for more than 4.3% of total assets. The product is slightly tilted toward financials at 27%, closely followed by technology (16.3%). Here again, China takes the top spot at 26 % while Taiwan and India receive a double-digit allocation each. The fund has amassed $2.1 billion in its asset base and trades in average daily volume of 526,000 shares. It charges 14 bps in fees per year and has a Zacks ETF Rank of 2 with a Medium risk outlook. The fund reached a 52-week high of $23.54 per share on Thursday, and has risen about 18.5% in the year-to-date timeframe.
WisdomTree Emerging Markets SmallCap Dividend Fund (DGS - ETF report)
This fund provides exposure to the dividend-paying small-cap companies in the emerging markets region by tracking the WisdomTree Emerging Markets SmallCap Dividend Index. It has accumulated over $1 billion in AUM and trades in average daily volume of roughly 90,000 shares. Expense ratio comes in at 0.63%. In total, the fund holds 591 stocks in its basket that are widely spread across each security with none holding more than 1.2% of total assets. The product is slightly skewed toward Taiwanese firms at 26.7%, followed by China (14.3%) and Brazil (11.3%). Financials, information technology and consumer discretionary make up for the top three sectors taking a double-digit allocation each in the portfolio. DGS scaled a fresh one-year high of $43.20 per share on Thursday, representing a gain of 22.2% in the year-to-date time frame. DGS has a Zacks ETF Rank of 3 with a Medium risk outlook (see: all the Emerging Market ETFs here).
SPDR MSCI Emerging Markets StrategicFactors ETF (QEMM - ETF report)
This fund follows the MSCI Emerging Markets (EM) Factor Mix A-Series Index and aims to represent the performance of value, low volatility, and quality factor strategies. It holds a basket of 841 stocks that are well spread out across various components. Each firm holds no more than 3.1% of assets. Further, the top sector – information technology – accounts for 25.7% of assets while financials (21.8%) and consumer staples (11.1%) make up for a nice mix. China, Taiwan and South Korea are the top countries with a double-digit exposure each. The product has amassed $99.4 million in its asset base and charges a fee of 30 bps per annum. Average daily volume is under 20,000 shares. The ETF has added 15.1% so far this year and hit a 52-week high of $55.18 per share in Thursday’s trading session. It has a Zacks ETF Rank of 3 with a Medium risk outlook.
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