After the speculation on Fed “tapering,” hot money exited emerging market exchange traded funds, but some believe the area now offers cheap investment opportunities, pointing to faster growth and higher yields than developed economies.
In June, a record $37 billion was pulled from emerging-market stock and bond funds, reports Prabha Natarajan for the Wall Street Journal. [Emerging Market ETFs with a Dividend Focus]
The iShares MSCI Emerging Markets ETF (NYSEArca: EEM) lost $3.9 billion in June, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) shrunk by $1.7 billion and the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) saw $800 million in outflows, according to IndexUniverse data. [Rising Rates Weigh on Emerging Market Bond ETFs]
“In some places, the correction has created opportunities,” Michael Gomez, co-head of Pacific Investment Management Co.’s emerging-market portfolio management team, said in the Wall Street Journal article.
Specifically, investors are steering toward countries that have improved balance sheets and don’t rely on outside investments to expand.
PIMCO has looked into Brazilian and Mexican fixed-income securities, pointing to Mexico’s strong state finances and Brazil’s high yields.
The Mexican peso is hit a 11-month low on June 20, but it has since appreciated 4% against the U.S. dollar. The country is implementing economic reforms that should help support steady growth.
“Nothing structurally has changed in Mexico over the last couple of months,” Thanasis Petronikolos, head of emerging-market debt at Baring Asset Management, said in the article.
Looking at EMB, Brazil makes up 6.5% of the ETF and Mexico is 6.10%. Additionally, investors interested in the two emerging markets can consider country-specific ETFs iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) and iShares MSCI Mexico Capped ETF (NYSEArca: EWW).
Some are also eying the Middle East as oil-and-gas producers have outperformed the broader emerging markets. For instance, the WisdomTree Middle East Dividend Fund (NYSEArca: GULF) gained 21.0% year-to-date while EEM lost 11.1%.
“While it’s harder for foreign investors to directly invest in these markets, the economic risk is minimal,” Julie Dickson, emerging-market analyst of Ashmore Investment Management Ltd., said in the article.
For more information on developing countries, visit our emerging markets category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own EEM.