Emerging Market ETFs: Cheap Valuations But Monitor Your Trades

The emerging markets are attracting more attention for their cheap valuations and improved growth as governments enact economic reforms. However, long-term exchange traded fund investors will have to closely monitor the area due to the greater volatility.

After the recent selling, the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) is down 6.6% over the past month while the rival Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) is 5.4% lower. [Market Volatility Sends EM ETF Investors to the Exits]

Now, Emerging Global Advisors’ Chief Strategist Nick Smithie argues that emerging market valuations are at attractive lows, reports Dimitra DeFotis for Barron’s.

“The MSCI Emerging Markets Index trades at 10.3 times its projected 12-month earnings, a discount of 30% compared to the MSCI World Index, while the average discount since June 2003 is 21%, which indicates that there may be opportunity for a multiple expansion as a part of mean reversion,” Smithie said in the article. “Valuations are also compelling based on the Shiller P/E ratio, which shows that the MSCI EM Index is below 14 times earnings, one standard deviation below its average since 2005.”

Looking at the emerging market ETFs, EEM is trading around a 12.0 price-to-earnings ratio and a 1.5 price-to-book while VWO is at a 12.7 P/E and a 1.6 P/B.

Smithie also points out that economic growth in the emerging markets is beating forecasts and could continue to expand as the countries mature.