The iShares MSCI Emerging Markets ETF (NYSEArca: EEM) lost nearly 4% last week and that only scrapes the surface of the miserable state of affairs for emerging markets ETFs.
When the closing bell rang Friday, nine of this year’s 10 worst non-leveraged ETFs were emerging markets funds and eight of those nine were sporting double-digit year-to-date losses. The iShares Latin American 40 ETF (NYSEArca: ILF) was not far behind with a 2014 decline of 9.8%. [No Heroes Among Emerging Markets ETFs]
However, it is not just the usual suspects like EEM, ILF, China, Brazil and other single-country funds that are vulnerable to an extended retrenchment in emerging markets shares. Several ETFs that, at least on the surface, are not explicit emerging markets plays could languish if developing world shares continue to careen lower. [Emerging Markets: Badness Happening Right Now]
Take the Guggenheim Solar ETF (NYSEArca: TAN). TAN was the best non-leveraged ETF of any kind last year, but in the past five trading sessions, the fund has plunged 12.3% as emerging markets stocks have swooned. TAN is not a pure play developing world ETF, but a combined 49% weight to China and Hong Kong says this ETF could be vulnerable if there is significant downside still to come for emerging markets stocks.
The good news is TAN has previously dealt with this situation. TAN more than doubled last year in what was a trying time for Chinese stocks.
The Guggenheim Shipping ETF (NYSEArca: SEA) is not a direct emerging markets play, either. Even when combining Hong Kong and Greece, the result is emerging markets combining for less than a quarter of SEA’s weight.
However, SEA lost 2.8% on almost double the average daily turnover last Friday because of the ETF’s leverage to the global economy. SEA is somewhat correlated to the Baltic Dirty Tanker Index and if emerging economies are slowing, markets are likely to price in lower oil demand. Bad news for SEA, but as is the case with TAN, SEA rallied last year, gaining 37.3%, amid an emerging markets slump. [Shipping ETF Looks to Rally]
Practically any large-cap focused industrial sector ETF can be added to this list, particularly if global growth concerns escalate. Last Friday, three of the Dow’s worst performers were Boeing (NYSE: BA), 3M (NYSE: MMM) and General Electric (NYSE: GE), significant portions of major industrial ETFs. The Industrial Select Sector SPDR (NYSEArca: XLI) and the Vanguard Industrials ETF (NYSEArca: VIS), two of last best sector ETFs, are both off more than 4% to start 2014.
The iShares MSCI Australia ETF (NYSEArca: EWA) is an obvious developed market fund to avoid if emerging markets, particularly China, funds find further downside. Australia’s status as a major commodities producer has hampered its economy and EWA, exposing the country’s and the ETF’s vulnerabilities to its dependence on China as a trading partner. Earlier this month, BlackRock downgraded Australia to underweight from neutral.
iShares MSCI Australia ETF
Tom Lydon’s clients own shares of EEM and GE.