Diversified exchange traded funds for emerging markets lost about twice as much as the S&P 500 during the third quarter, but bulls are hoping developing markets can lead the way for a fourth-quarter market bounce.

Although debt problems in Europe and the U.S. dominate the headlines, a bigger worry may be sharp declines in emerging markets ETFs tracking countries that are supposed to be key drivers of the global economy. [BRIC ETFs Crumbling]

The iShares MSCI Emerging Index Fund (NYSEArca: EEM) lost 26.3% in the third quarter, compared with a 13.7% loss for the iShares S&P 500 (NYSEArca: IVV), according to Morningstar data.

Emerging markets ETFs have been touted as useful portfolio diversification tools, but their heightened volatility can frustrate investors.

The chart below is the ratio of the emerging markets fund versus an S&P 500 ETF. It shows the recent underperformance of developing markets against U.S. stocks.

Still, some analysts say investors shouldn’t give up on emerging markets.

According to Jerome Booth, head of research for Ashmore, investors are disregarding the fundamentals as valuations on emerging market assets are “sharply at odds with underlying risks,” reports Myra Saefong for MarketWatch. In a recent recent note, Booth also points out that emerging market economies are insulated from the weakness in the G-10 because of “solid domestic demand, strong reserve cushions and domestic financing sources.”