On Thursday, the Federal Reserve finally announced its intent to taper its bond-buying program. The central bank will reduce the amount of its monthly asset purchases to $75 billion from $85 billion with equal reductions to purchases of mortgage and Treasury bonds.
As luck would have it, the tapering news was seen as an affirmation from the Fed that the U.S. economy is strong and that was supportive for emerging markets exchange traded funds. That is correct. One of the asset classes seen as most vulnerable to the loss of Fed stimulus, emerging markets stocks, jumped on the tapering news. To be accurate, the jumping was done by ETFs since most bourses in the developing world are closed while U.S. markets are open. [BlackRock: A Long Haul Emerging Markets ETF]
Still, 2013 will go down as a rough year for emerging markets equities. The Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), the two largest emerging markets ETFs by assets, are down an average of 7% this year. Some country ETFs have been much, much worse. [10 Worst Global Equity Markets By Single-Country ETFs]
With an eye to 2014, we offer up nine emerging markets ETFs to consider monitoring as the new year unfolds. The list is admittedly subjective and focuses on single-country ETFs. Diversified ETFs will be featured in another list. The ETFs highlighted here not appear in any particular order.
iShares MSCI Brazil Capped ETF (NYSEArca: EWZ)
2013 YTD: -18.8%
Comment: The largest ETF tracking Latin America’s largest economy endured its share of woes in 2013. Not only is EWZ likely to end the year as the worst performer among the four largest BRIC single-country ETFs, it will rank as the worst single-country ETF, emerging or developed market, in terms of 2013 outflows and that sordid competition is not even close.
On the basis that things cannot get much worse for Brazilian stocks, EWZ could be better in 2014, but that is no guarantee of alpha nor is it sound investing. Not to mention, elections, Carnival, holidays and the World Cup could hamper Brazilian economic output in 2014. [Calendar Conundrum for Brazil ETFs in 2014]
iShares MSCI South Korea Capped ETF (NYSArca: EWY)
2013 YTD: -0.6%
Comment: The dominant name among South Korea ETFs has a chance to end 2013 in the green. Earlier this year, the Bank of Korea highlighted the weak yen and Fed tapering as the two biggest risks facing Asia’s fourth-largest economy. Tapering is officially here and most forex market observers believe USD/JPY will rise next year, but EWY has surged almost 18% over the past six months. Adding to South Korea’s allure is its current account surplus.
Market Vectors Indonesia Index ETF (NYSEArca: IDX)
2013 YTD: -25%
Comment: We’re not picking on IDX here because none of the three Indonesia ETFs have performed well this year. The rupiah, the worst-performing developed market currency, has led to widening external deficits. Citing the weak currency, J.P. Morgan recently revealed an underweight rating on Indonesian shares.
iShares MSCI Turkey ETF (NYSEArca: TUR)
2013 YTD: -19.4%
Comment: TUR lost its way this year as Turkey went from being one of the most stable countries in its corner of the world to one of the most politically volatile. That volatility was on display earlier this week as Turkish stocks plunged Monday on a slew of corruption charges. TUR is still vulnerable, but a move below $50 could be a buying opportunity that delivers decent returns in 2014.
WisdomTree India Earnings ETF (NYSEArca: EPI)
2013 YTD: -8.8%
Comment: EPI ranks as the second-worst of the major BRIC ETFs on a year-to-date basis, but this and other India ETFs have been in rally mode since September. Over that time, EPI is up 27%. While growth in Asia’s second-largest economy is expected to remain slack next year, the government could steer the country in the right direction, assuming it takes seriously the need for reform and infrastructure investment. India’s national election could be a positive and necessary catalyst for Indian stocks next year because observers see few outlets for increased growth. [India ETFs Might Not Turn Around Any Time Soon]
Market Vectors Poland ETF (NYSEArca: PLND)
2013 YTD: 3.1%
Comment: PLND has a rival in the form of the iShares MSCI Poland Capped (NYSEArca: EPOL) and both have been bright spots among single-country emerging markets ETFs this year. A strong zloty has helped. Polish stocks are pricier than their Russian counterparts, but the performances have justified the premium as does Poland’s recently posted current account surplus.
iShares MSCI Philippines ETF (NYSEArca: EPHE)
2013 YTD: -14.3%
Comment: EPHE entered 2013 as one of 2012’s best single-country ETFs and the lone Philippines fund kept the good times going until the second quarter, when the tapering conversation. Given the Philippines’ strong external accounts and the massive inflows of dollars back into the local economy, the tapering issue may have been overstated with regards to Philippine stocks.
The typhoon that recently ravaged the country is another matter altogether and while Philippine stocks have priced in the effects of that disaster, the Philippines PSE stock index is vulnerable if it declines below 5,600. That move would send EPHE swooning.
iShares MSCI China ETF (NYSEArca: MCHI)
2013 YTD: 1.4%
Comment: The Chinese economy is the world’s second-largest and there are over 260 ETFs offering exposure to stocks there, so we included two on the list. We start with MCHI. On the surface, MCHI looks similar to the larger, more heralded iShares China Large-Cap ETF (NYSEArca: FXI). However, MCHI is home to more stocks and a lower allocation to the banking sector. More importantly, MCHI outperforms FXI over longer time frames. MCHI has trumped its rival by almost 1,100 basis points over the past two years.
db X-trackers Harvest CSI 300 China A-Shares Fund (NYSEArca: ASHR)
Comment: ASHR is the newest ETF on this list and one of 2013’s most successful new ETF launches. The ETF is just about six weeks old and already has $213.8 million in assets under management. ASHR is more diverse than its H-shares rivals, offering deeper exposure to China’s consumer story and stocks in Shanghai and Shenzhen are still inexpensive. [A-Shares ETF Stands Out in Crowded Field]