The Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) are each down more than 3% this year, but rushing to sell these funds and other emerging markets ETFs at this juncture may not be the best play.
Investors are departing low valuation emerging markets in favor of pricier developed markets. For a second consecutive year, VWO and EEM, the two largest emerging markets ETFs by assets, rank among the 10 worst ETFs regarding departed assets. Of the 10 best asset gatherers this year, seven are developed markets ETFs, including the iShares Russell 2000 ETF (NYSEArca: IWM), iShares MSCI EMU ETF (NYSEArca: EZU) and the Vanguard FTSE Europe ETF (NYSEArca: VGK). [Following ETF Money]
Investors may want to reassess the follow-the-herd mentality of departing discounted emerging markets equities.
Investors are dropping high-yielding emerging stocks at low valuations while they should be looking for underpriced assets BlackRock portfolio manager Sam Vecth told Isobel Finkel of Bloomberg. “Stock prices have fallen and now look cheap on absolute, and very cheap on a relative basis to the developed world,” said Vecth in the interview.
One market Vecht is bullish on is Turkey. Dating back to mid-2013, the iShares MSCI Turkey ETF (NYSEArca: TUR) has been stung by talk of Federal Reserve tapering, political volatility and a plunging lira that exacerbated Turkey’s current account deficit.
In late January, Turkish central bank raised its overnight lending rate to 12% from 7.75% and more than doubled the overnight borrowing rate to 8% to 3.5% in one of the boldest moves by any central bank in recent memory to defend a flailing currency. Since the start of February, TUR is up nearly 9%. [Central Bank Salvation for Turkey ETF]
BlackRock is overweight Turkish banks, which fell below book value for the first time in five years in December, according to Bloomberg. The $535.6 million TUR allocates 45.1% of its weight to the financial services sector, more than triple the weight the ETF devotes to any other sector, according to iShares data.
TUR’s P/E ratio of 11.1 is well below the comparable ratio on EZU and the S&P 500. In the six-year period ending 2013, TUR outperformed EEM in four of those years.
iShares MSCI Turkey ETF (NYSEArca: TUR)
Tom Lydon’s clients own shares of EEM and IWM.