After years of falling behind, emerging market stocks and related exchange traded funds may be putting the worse behind them and begin moderately outpacing U.S. markets.
Year-to-date, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), which tracks the FTSE Emerging Index, is up 2.3% and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), which follows the MSCI Emerging Markets Index, is 2.1% higher while the SPDR S&P 500 ETF (NYSEArca: SPY) is up 2.6%. [Emerging Markets ETFs Could Rebound in Second Quarter]
After largely underperforming developed markets over the past couple of years, some argue that emerging markets may begin pulling ahead, reports Dhara Ranasinghe for CNBC.
“My view is that we may be getting to the end of the period of underperformance; not across the board with commodity producing economies in particular still going to be hit,” Neil Shearing, chief emerging markets economist at Capital Economics, told CNBC. “But if you think about all the headwinds emerging markets have had to face – a slowing economy in China, big falls in commodity prices and commodity producing EMs, and the shift of policy accommodation to policy tightening in the U.S., these have probably now largely been priced in.”
Shearing pointed out that India has been a bright spot in an otherwise blemished emerging market, with Russia, Brazil and South Africa grappling with problems of their own. India has been one of the better performers over the past year, with the WisdomTree India Earnings Fund (NYSEArca: EPI) up 29.7%. [Emerging Market ETFs: Keep Watch Over Fragile Three]
Additionally, the mass exodus from emerging markets may be attributed to the strengthening dollar – as emerging market currencies have quickly declined against the greenback, with the exception of a few like the Indian rupee, U.S. investors have seen even greater declines since a weaker foreign currency translates to a lower U.S. dollar return.
However, investors can diminish forex risks through hedged-currency ETFs. For instance, the iShares Currency Hedged MSCI Emerging Markets ETF (NYSEArca: HEEM) and the Deutsche X-trackers MSCI Emerging Markets Hedged Equity Fund (NYSEArca: DBEM) track developing markets while hedging against depreciating overseas currencies. Year-to-date, the two ETFs have slightly outperformed, with HEEM up 3.8% and DBEM 3.3% higher. [A Return to Emerging Market ETFs]
Looking ahead, Shearing argues that emerging markets could outperform, but investors should still temper their expectations as he expects modest gains of about 5% to 6% over the next year or so, which is still better than the U.S. outlook.
“In relationship to developed markets, the big period of underperformance may well now have happened,” Shearing added.
Vanguard FTSE Emerging Markets ETF
For more information on the developing economies, visit our emerging markets category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.