Emerging markets stocks and exchange traded funds, many of which notched dismal performances last year, are offering up sequels to those unfortunate performances. Abundant are the anecdotes that illustrate just how ugly emerging markets ETFs have been to start 2014.
This is the worst start to year for emerging markets equities since 2011, but there is more on the gloomy emerging markets anecdote front. The Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), the two biggest emerging markets ETFs by assets, are both off at least 4.5% year-to-date. As they did last year, both EEM and VWO rank among this year’s 10 worst ETFs in terms of outflows.
We noted on Wednesday that eight of the 10 worst-performing non-leveraged ETFs to start 2014 were emerging markets funds. What a difference a day makes. Thursday’s tumble for the iShares MSCI Turkey ETF (NYSEArca: TUR), a slide that has carried into Friday, has “elevated” the ETF to the dubious status of 2014’s worst non-leveraged ETF. As of Thursday’s close, nine of worst 10 ETFs were equity-based developing markets plays. [EM ETFs Not Rebounding as Hoped]
Chart Courtesy: ETF Replay
Woes for emerging markets stocks did not start this year. After a year of struggling with Federal Reserve tapering, faltering currencies, dwindling commodities demand and widening account deficits, among other glum factors, most emerging markets ETFs finished 2013 in the red with many showing signs of weakness late in the year.
Goldman Sachs is forecasting “significant underperformance” for developing world equities, debt and currencies over the next decade while JPMorgan Chase & Co. expects local-currency bonds to post 10 percent of their average returns since 2004 in the coming year and Morgan Stanley expects the Brazilian real, Turkish lira and Russian ruble will extend declines after tumbling as much as 17 percent in 2013, according to Bloomberg. [No One Likes Emerging Markets]
There were signs late last year that 2014 could be another rough time for developing world stocks. Over the past month, 24 of the 30 worst non-leveraged ETFs are emerging markets funds. Of the unlucky 13 on that list, five are Latin America ETFs, including the downtrodden iShares MSCI Brazil Capped ETF (NYSEArca: EWZ).
Speaking of 13, that is how many ETFs have made new all-time lows to this point in Friday’s session, nine of which are emerging markets funds. In proof that some folks should stop hoping for a divergence, decoupling or related move with developing credit markets, three of those nine emerging markets ETFs that hold bonds denominated in local currencies.
All of this excellent news for emerging markets bears with appetites for risk. As of Thursday’s close, the three best ETFs year-to-date in Direxion’s stable are the Direxion Daily Brazil 3x Bear Shares (NYSEArca: BRZS), the Direxion Daily FTSE China Bear 3X Shares (NYSEArca: YANG) and the Direxion Daily Korea 3x Bear Shares (NYSEArca: KORZ).
On Thursday, Direxion’s top five inverse, leveraged ETFS were all emerging markets funds.
Tom Lydon’s clients own shares of EEM.