Despite concerns over another sell-off in developing markets as the Fed turns off the flow of easy money, some emerging market exchange traded funds can provide a cheap way to access countries with improved fundamentals and economic reforms.
Specifically, emerging Asia is still attracting attention. According to the Institute of International Finance, Asian emerging markets pulled in $9.7 billion over August, whereas emerging markets in Europe, the Middle East and Africa saw outflows, reports Chao Deng for the Wall Street Journal.
“Flows [to Asia]look more robust because these economies are generally doing quite well and [their]exports [are]benefiting from the recovery of countries tightly linked to the global supply chain,” Charles Collyns, chief economist at the institute, said in the article. “We expect capital flows to Asia to remain solid,” unless the market starts expecting the Fed to raise rates sooner than later.
The SPDR S&P Emerging Asia Pacific ETF (NYSEArca: GMF), which follows emerging Asian economies, including China 38.9%, Taiwan 24.1% and India 16.9%, has gained 5.3% over the past three months, whereas the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), which tracks the MSCI EM Index, is up 0.4%. [Areas of Potential Weakness in Emerging Market ETFs]
However, even if interest rates do rise, some argue that investors can still pick and choose areas that show strength. For instance, Ajay Argal, head of Indian equities at Barings Asset Management, believes India is in a better position to hold up against higher U.S. rates after the country cut down its current-account deficit to below 2% of gross domestic product – a lower current-account deficit helps support a stronger domestic currency. Other companies, like Standard Life Investments and AllianceBernstein are also pointing to the country’s closed capital accounts, which help insulate the domestic economy from the effects of U.S. rate hikes.
The WisdomTree India Earnings Fund (NYSEArca: EPI) has gained 3.2% over the past three months and is up 32.0% year-to-date.
Additionally, Stuart Rae, AllianceBernstein’s chief investment officer, believes Chinese stocks look cheap and companies could benefit from lower commodity prices and higher consumer demand due to improved wages. The market is still developing, with companies fighting for market share. Additionally, fundamentals are improving, including those at big state-owned enterprises.
“We’ve generally been underweight SOEs, but now we’re adding,” Alistair Way, investment director of emerging markets at Standard Life, said in the article.
The iShares China Large-Cap ETF (NYSEArca: FXI), which tracks large-cap Chinese firms, including large state-owned companies, has gained 6.7% over the past three months. [China ETFs to Generate Slower and Steadier Returns]
Alternatively, investors can target the two large Asian economies through the First Trust ISE Chindia Index Fund (NYSEArca: FNI), which includes Chinese and Indian stocks. FNI is up 5.7% over the past three months. [Emerging Markets Two-Step Lifts This ETF]
For more information on developing economies, visit our emerging markets category.
Max Chen contributed to this article.