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.”
“The emerging markets represent long-term value, and have been mispriced as capital flees to the dollar,” Matt Lasov, director of global research at Frontier Strategy Group, remarked.
Emerging market sector ETFs allow investors to gain targeted exposure to specific areas of in the emerging markets. For instance, EG Shares offers a wide range of sector ETFs based on emerging market companies. [Emerging Market ETFs Go Mainstream]
“The difficulty lies in the cost and the time and the complexity in getting into these markets,” Bob Holderith, president and founder of EG Shares, commented, reports Jason Abbruzzese for Financial Times. “We’ve learned how complex it is and we’ve learned how to navigate it.”
Holderith points out that these emerging market sector funds may help investors capitalize on specific economic trends within the emerging markets, more notably the “amount of money being spent on infrastructure and by the consumer.”
Besides EG Shares, Global X and Guggenheim also offer targeted exposure to markets in China and India. [The Growth Story Behind China’s Economy, ETFs]
- Vanguard Emerging Markets ETF (NYSEArca: VWO)
- iShares MSCI Emerging Index Fund
- EGShares Emerging Markets Consumer (NYSEArca: ECON)
For more information on the emerging markets, visit our emerging markets category.
Vanguard Emerging Markets ETF
Max Chen contributed to this article.