Getting Selective With Emerging Markets

January 12th at 8:00am by Todd Shriber

Widely held emerging markets exchange traded funds have done nothing to convince wary investors this year will be better than the last.

The Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), the two largest emerging markets ETFs by assets, are both down more than 3% to start 2014. None of the four major BRIC single-country ETFs have posted gains in 2014. The major BRIC ETFs have been so bad to start the year that the WisdomTree India Earnings ETF (NYSEArca: EPI) is the best of the lot with a 2.2% loss. [Nine Single Country ETFs to Watch in 2014]

Although the slump afflicting some of the largest emerging markets ETFs (and some of the mid-tier country funds as well) has not shown any signs of abating, that does not mean opportunity among developing world equities is dead. However, slide emerging markets do place a burden of selectivity on investors. [Opportunities With Emerging Markets ETFs]

“Another good bet are firms within sectors that are aligned with the interest of reform-minded governments—or in sectors far from the focus of political change,” reports Reshma Kapadia for Barron’s.

China is mentioned in the Barron’s as a “good first stop for bargain hunters.” The valuation call is accurate as Chinese stocks are among the emerging world’s least expensive, but while Beijing has become increasingly reform-minded, the China ETFs that have been the biggest winners in recent months have little, if any, exposure state-run firms.

Chinese technology and Internet names look expensive to the market as a whole, but these have been the star performers. Over the past 90 days, the KraneShares CSI China Internet Fund (NasdaqGS: KWEB) is up almost 10% while the tech-heavy Powershares Golden Dragon Halter USX China Portfolio (NYSEArca: PGJ) is higher by 6.5%. Over the same time, the largest China ETF is off 4%. [Not Everyone is in Love With Internet ETFs]

Developing economies can still generate above-average returns as a growing middle class demands a higher standard of living. For instance, the rise in discretionary spending should help boost car sales. And is the emerging markets consumer story that helped the EGShares Emerging Markets Consumer ETF (NYSEArca: ECON) posted a modest gain last year while being inflow positive during a year in which many diversified emerging markets funds posted notable losses and were stung by heavy outflows.

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