Emerging market exchange traded funds (ETFs) posted phenomenal growth last year, but some investors are beginning to turn their eyes back to developed economies as Western countries show they are back in business.
On the pro-developed markets side: the U.S. is posting better-than-expected growth, Germany is doing quite well and the rest of Europe may dodge a financial meltdown, remarks Alex Frangos for The Wall Street Journal. [5 ETFs for the U.S. Equity Boom.]
Meanwhile, emerging markets like India, China, Brazil and Indonesia, are struggling to subdue their high inflation rates, and observers are anxiously waiting to see if policymakers will overreact. Additionally, some of these markets, stocks and bonds are hovering around all-time highs. [Emerging Market ETFs: VWO Takes the Lead.]
Citigroup analysts Geoffrey Dennis and Jason Press note that emerging market stocks are trading at a 10% discount to developed markets on a forward price-to-earnings ratio. Citi projects that emerging markets will continue to grain 30% this year.
Let’s compare:
- SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA) is up 4% year-to-date
- SPDR S&P 500 ETF (NYSEArca: SPY) is up 4% year-to-date
- iShares MSCI Emerging Markets (NYSEArca: EEM) is down 1.5% year-to-date
- Vanguard Emerging Markets (NYSEArca: VWO) is down 1.4% year-to-date
Who gets the edge? When you look at the broad indexes and ETFs, the United States is doing slightly better. But don’t take that to mean developing markets have fallen out of favor; there are many emerging countries doing much better than developed ones.
If you can’t really give the win to either market type, then consider that S&P 500 companies with more than half of their revenue coming from overseas are expected to see sales increase 10% as compared to the 6% gain in total sales for companies that target the domestic market. Investing in multinational American companies with emerging market exposure will help mitigate some of the risk associated with the developing worked, such as inflation and political changes.
For more information on the emerging markets, visit our emerging markets category.
Max Chen contributed to this article.