Emerging Market ETFs: What Rally?

March 25th at 10:42am by John Spence

Emerging market ETFs aren’t participating in the equity rally in 2013 with the U.S. dollar strengthening since the beginning of February.

For example, iShares MSCI Emerging Markets (NYSEArca: EEM) is down 5.4% year to date while SPDR S&P 500 ETF (NYSEArca: SPY) has gained 9.8%, according to Morningstar performance data. [Emerging Market ETFs Diverge from S&P 500]

It has been the worst first quarter for emerging markets since 2008 and the asset class is trailing developed markets by the most in 15 years as economic growth stalls, according to Bloomberg. A stronger dollar has also weighed on the performance of emerging market ETFs.

Investors have pulled over $1 billion from EEM, the emerging markets ETF, so far this year. [ETF Chart of the Day: Emerging Markets]

“While higher volatility in developing countries led to outsized gains during the last six bull markets, this time is proving different,” Bloomberg reports. “Bulls say emerging markets will lead the next stage of the global rally as record low interest rates send investors into riskier securities. Pessimists say the trend will continue as investors favor more transparent markets.”

“The old rules of thumb may need to be questioned,” said Wayne Lin, a money manager at Legg Mason, in the article. “It is surprising to many investors that emerging markets haven’t participated in the rally.”

For investors, the big question is how long emerging and developed market ETFs can diverge. Are developed markets due for a correction, or will emerging economy ETFs rally to catch up?

iShares MSCI Emerging Markets

emerging-market-etf

Full disclosure: Tom Lydon’s clients own EEM.

The opinions and forecasts expressed herein are solely those of John Spence, 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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