ETF Performance: A Selective Approach to Emerging Markets

April 19th at 7:00am by Tom Lydon

Since the October 2011 lows, emerging market equities and stock exchange traded funds have made significant gains, but some areas are beginning to taper off. It may be time to selectively pick performing countries and cut out the rest.

“Despite emerging markets’ strong recent performance, I believe there are two major reasons why investors should still consider overweighting select countries relative to their weight in the MSCI ACWI benchmark,” writes Russ Koesterich, CFA, Global Chief Investment Strategist at iShares. “Since not all emerging markets currently look attractive, I continue to advocate overweighting only certain areas through a regional and country implementation.”

Specifically, Koesterich singles out ETFs that follow Latin America, Brazil, China and Russia, including:

  • iShares MSCI Emerging Markets Latin America Index Fund (NasdaqGM: EEML)
  • iShares S&P Latin America 40 Index Fund (NYSEArca: ILF)
  • iShares MSCI Brazil Index Fund (NYSEArca: EWZ)
  • iShares MSCI China Index Fund (NYSEArca: MCHI)
  • iShares MSCI Russia Capped Index Fund (NYSEArca: ERUS)

As a whole, emerging markets remain relatively cheap on a historical basis and compared to developed markets. The MSCI Emerging Market Index is currently trading at about 12x earnings, compared to its long-term average P/E ratio of about 16%. Additionally, the 12x earnings is also a 22% discount to the MSCI World Index. [Emerging Market ETFs Capture the Next ‘Engine of Growth’]

“And historically, when emerging market stocks have been at a 20% or more discount to developed market equities, they have significantly outperformed over the next year,” Koesterich noted.

Furthermore, declining inflation levels also continues to support emerging market equities, with the exception of India. For example, inflation in China has dropped 6.5% to about half its previous level over the past nine months, while inflation in Brazil has diminished to 5% from 7.5%.

“Lower inflation should provide for some multiple expansion in emerging market stocks,” Koesterich said.

For those interested in lower risk alternatives for emerging market exposure, you may take a look at the iShares MSCI Emerging Markets Minimum Volatility Index Fund (NYSEArca: EEMV).

For more information on developing economies, 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.