Emerging Market ETFs: Still In the Game?

February 10th at 3:00pm by Tom Lydon

Developed markets are finally back on the up-and-up. Just in time, too, because emerging market exchange traded funds (ETFs) are showing some signs of flattening out. But will that mar their image as a portfolio diversifier and, in the right climate, potential returns enhancer?

The short answer is that unrest in a couple of frontier markets poses a marginal threat to emerging market ETFs, and they’ve apparently not scared investors off for good, according to Money Control. [5 ETF Lessons from Protests in Egypt.]

Some ETF providers are even taking steps to ameliorate any negative impact from the conflicts. David Gardner, head of sales for iShares EMEA, stated that “potentially problematic” companies have been removed from their main emerging market ETFs, such as iShares MSCI Emerging Markets (NYSEArca: EEM).

Several emerging market countries have implemented tighter monetary policies and higher interest rates that were aimed at curbing the rising inflation rates, which have left some investors wondering how much growth could be stunted, reports Meg Handley for U.S. News & World Report.

That said, you can’t exactly count out emerging markets. Dips after periods of strong growth aren’t unusual, particularly in some of the more volatile countries. It’s a risk that ETF investors understand.

Experts agree: they still project emerging economies will expand faster than developed countries. The International Monetary Fund projects developed economies will grow by 2.5% this year while emerging markets could expand by 6.5%. [Faceoff: Developed and Emerging Market ETFs.]

At this point, however, EEM and Vanguard Emerging Markets (NYSEArca: VWO) are right around their long-term trend lines. The time to get back in – if that’s what you’re looking for – may not be until the negative performance goes positive.

For more information on the emerging markets, visit our emerging markets category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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