Conservative Emerging Markets Dash Investors’ Shelter Hopes

A toxic cocktail of negative news is afflicting emerging markets bonds, currencies and equities leaving investors with little to no shelter from the storm in the developing world.

The catalysts for the current emerging markets washout are almost too numerous to list here, but the “highlights” include renewed fears about a slowdown in China and the fragility of the mammoth banking system in the world’s second-largest economy, repudiation of almost any investment with ties to Latin America, Turkey’s regression from regional star to big-time mess and violence in Ukraine. [Skirt This Bond ETF for Now]

“Among the strategies being pursued to limit losses or take advantage of the weakness are buying ETFs that have short exposure to Brazil and other Latin American countries, buying funds that invest in mid-cap companies seen as less tied to global turmoil, and investing more in exporters in countries like South Korea and Mexico,” report David Randall and Ashley Lau for Reuters.

Unfortunately, betting on some of the more conservative, lower beta emerging markets this year has not been too effective. In fact, the strategy has been barely been less bad than buying a diversified emerging markets fund such as the iShares MSCI Emerging Markets ETF (NYSEArca: EEM). This after 2013, a year in which low volatility emerging markets ETFs did outperform their more traditional brethren. [Some Low Vol ETFs Worked in 2013]

The iShares MSCI South Korea Capped ETF (NYSEArca: EWY) and the market it tracks are prime examples of the shelter from the storm fallacy. EWY was bid higher in the second half of last year as investors embraced low valuations and South Korea’s reputation for being an advanced, lower beta emerging market.