The third quarter was fraught with volatility barring a few highs hit by the broader U.S. market indices. However, the issues that the quarter faced cropped up mostly in the developed markets. Growth issues and uncertainty over central bank policies weighed on the region while emerging markets (EM) equities were on a tear.
The key U.S. equity gauge SPY gained about 3.3%, (DIA - ETF report) added over 2.1% and (QQQ - ETF report) moved higher by about 10.4% in the third quarter (as of September 30, 2016). Developed market ETF Vanguard FTSE Developed Markets ETF (VEA - ETF report) advanced 5.8% while emerging market ETF iShares MSCI Emerging Markets (EEM - ETF report) tacked on about 9% gains.
Why EM Equities Are Surging?
Accommodative developed market central banks, which have kept interest rates low for long, bolstered demand for higher-yielding emerging market securities. The growth picture of EM equities is brighter than that of the developed markets. If this is not enough, many emerging markets like Indonesia and India are cutting interest rates to boost growth amid lower inflation.
According to IMF data, emerging market & developing economies grew 4% in 2015 and are expected to expand 4.1% in 2016 and 4.6% in 2017. These are higher than global growth of 3.1% seen in 2015 as well as 3.1% and 3.7% expected for this year and the next, respectively (read: 5 Reasons Why Emerging Market ETFs are Still a Buy).
In comparison, the U.S. economy expanded 2.4% in 2015, and will likely grow 2.2% this year and 2.5% in 2017 while the Euro zone growth rate was 1.7% in 2015. The common currency bloc will likely slow down to 1.6% this year and 1.4% in 2017.
Thanks to a dovish Fed and a few more days of cheap dollar inflows, EM equities gave a stellar performance in the third quarter (read: Fed Plays Safe As Expected, Outlook Positive: ETFs to Buy).
Last but not the least, commodity prices remained firm on a favorable demand-supply scenario and a lower greenback. Since several emerging markets are commodity-rich, rising commodity prices showered gains on the bourses of these countries.
Top Performing ETFs of Q3
Though there have been several winners in the EM pack, below we highlight a few top-performing ETFs (see all Broad Emerging Market ETFs here).
EMQQ Emerging Markets Internet & Ecommerce ETF (EMQQ - ETF report) ) – Up 21.0%
The fund gives exposure tothe Internet and Ecommerce sectors of Emerging economies. Technology across the board space has seen an upswing lately, spreading the cheer to this EM tech fund as well. Growth potential in EMQQ depends largely on technological expansion in emerging markets – which still have enough room for growth.
First Trust RiverFront Dynamic Emerging Markets ETF (RFEM - ETF report) ) – Up 16.1%
This ETF is active and does not track a benchmark. The fund has heavy weights in South Korea (19.1%), China (16.7%) and Taiwan (13.6%). Financials accounts for about one-fourth of the fund followed by Information Technology (19.7%) and Consumer Discretionary (13.6%).
WisdomTree Emerging Markets ex-State-Owned Enterprise ETF (XSOE - ETF report) – Up 14.4%
The fund can entice investors having less faith in the state-owned emerging market companies, but still intending to tap the region’s growth story. According to the issuer, the MSCI emerging market index generated lesser returns than the U.S. markets in previous years for which the anemic performance of the SOE was responsible (read: This New Emerging Market ETF Avoids State-Owned Firms).
In terms of geographic exposure, China (27.5%), South Korea (17.1%) and Taiwan (11.6%) have a double-digit exposure each.
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