The largest ETF for emerging markets is outperforming the S&P 500 for the seventh straight day.

Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) rallied about 5% last week while SPDR S&P 500 ETF (NYSEArca: SPY) added 1.5%. On Monday, VWO gained more than 1% to lead the S&P 500.

The iShares MSCI Emerging Markets (NYSEArca: EEM) has also rallied lately thanks in part to rebounds in hard-hit developing markets such as India and Brazil. [BRICs Lead Emerging Market ETFs]

The recent outperformance of emerging markets bears watching because the asset class has been such a disaster in 2013 on Fed tapering fears. Developing markets outperforming emerging markets has been the dominant theme is 2013.

“Emerging market stocks staged a very powerful rally, strongly outperforming the U.S., but without their own credit spreads narrowing in a commensurate way. This makes the move last week a bit suspect, with persistent leadership important to keep an eye on,” Pension Partners said in a note.

EEM is down about 9% year to date while SPY has delivered a total return of nearly 18%.

ETFs that invest in emerging market equities saw net outflows of $3.5 billion in August on Fed tapering talk, according to BlackRock. Investors have pulled $11.1 billion from emerging market stock ETFs year to date.

Weakening currencies have also weighed on emerging market ETFs in 2013.

The question for investors is if emerging markets are undervalued after the sell-off.

Emerging markets are “unambiguously cheap” right now, Russ Koesterich, global chief investment strategist at BlackRock, told CNBC.

“We will see some better performance,” he said. “The issues there are real. The question for investors is how much is this reflected in price? EM [is]currently trading at about a 35% discount to developed markets. Historically, that’s been a good entry point.”

The chart below shows the relative performance of the emerging market ETF (EEM) against the S&P 500 (SPY). The chart is testing a key horizontal resistance line. [Waiting for The Turn In Emerging Markets ETFs]

Full disclosure: Tom Lydon’s clients own SPY and EEM.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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