The double whammy of a hawkish Fed and trade war fears between the United States and China plagued emerging market (EM) investing in the second quarter. iShares MSCI Emerging Markets ETF (EEM - Free Report) lost 8.6% in the last three months against a 5.3% gain in the S&P 500 index. Almost the entire EM space was in the red in Q2.
Why EM Bled So Badly
As talks of faster-than-expected Fed rate hikes started doing rounds, U.S. Treasury yields moved higher and the greenback gained strength. U.S. 10-Year Treasury bond yields crossed 3% in late April for the first time since January 2014.
The Fed is now planning a total of four rate hikes in 2018, quite contrary to previous projections of a total of three increases this year. As a result, Invesco DB US Dollar Bullish (UUP - Free Report) added about 5.7% in the last three months.
Meanwhile, the European Central Bank (ECB) has announced plans of exiting the QE policy by the end of this year. The withdrawal of support from the ECB and the Fed caused an upheaval in the EM space. The last three months were especially downbeat EM currencies with WisdomTree Emerging Currency Strategy ETF CEW losing about 6.6% (read: Top and Flop EM ETFs as Taper Tantrum Completes 5 Years).
Added to this were trade war tensions. Both China and the United States are now eyeing a 25% tariff on each other’s $50 billion of goods. The situation may take an ugly turn as White House said this week that if China keeps retaliating to U.S. tariffs, the United States will enact tariffs on an extra $200 billion worth of Chinese goods (read: Fed, Trade & Global Politics to Rule June: 6 ETF Picks).
Amid broad-based fears about EM investing, investors are extracting funds from even Asian economies with better prospects. Overseas funds withdrew from six major Asian emerging equity markets at a clip not seen after the global financial crisis of 2008 (read: Inverse EM ETFs to Gain as Easy Money Starts Drying Up?).
ETFs in Focus
Against this backdrop, we highlight below a few EM ETFs that have lost the least in the last three months (as of Jun 29, 2018).
Legg Mason Emerging Markets Low Vol High Dividend ETF (LVHE - Free Report) – Down 0.6%
The fund targets dividend-paying emerging market companies with lower volatility than traditional equity investments in these regions. Taiwan (15.3%), China (14.6%) and Malaysia (13.6%) are the top three geographies of the fund. Financials (22.9%) is the top sector followed by Materials (16.0%) and Telecom (15.4%).
iShares Edge MSCI Min Vol EM Currency Hedged ETF – Down 2.86%
The fund offers the currency-hedged exposure to the MSCI EM Minimum Volatility Index. China (27.09%), Taiwan (16.04%) and South Korea (9.74%) get the top three spots. Financials (24.07%), Information Technology (22.34%) and Consumer Staples (11.51%) have a double-digit exposure to the fund.
Xtrackers MSCI Emerging Markets Hedged Equity ETF (DBEM - Free Report) – Down 4.81%
The underlying index provides exposure to equity securities in the global emerging markets, while at the same time mitigating exposure to fluctuations in currencies. Information Technology (27.19%) and Financials (22.07%) have a double-digit exposure to the fund. China (31.15%), South Korea (14.15%) and Taiwan (11.22%) take the top three positions in the fund.
iShares Currency Hedged MSCI Emerging Mkts ETF (HEEM - Free Report) – Down 4.94%
The fund looks to lower the impact of foreign currencies, relative to the U.S. dollar. Here also, China (31.15%), South Korea (14.15%) and Taiwan (11.22%) take the top three positions in the fund while Information Technology (27.9%) and Financials (27.91%) have a double-digit exposure to the fund.
Invesco DWA Emerging Markets Momentum ETF (PIE - Free Report) – Down 6.35%
The fund has a double-digit weight in Information Technology (28.68%), Consumer Discretionary (14.89%), Financials (14.06%) and Industrials (10.14%). China (30.30%), Taiwan (27.52%) and South Africa (12.17%) are the top three geographic areas of the fund.
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