Emerging Markets ETFs Could Rebound in Second Quarter

It is a familiar refrain heard by investors in emerging markets equities and exchange traded funds. “The next (insert time frame here, months, years, etc.) will be better.”

That has not always proven true. Year-to-date, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), the two largest emerging markets ETFs by assets, are up an average of 1.8%. Those performances are better than losses, but are also hardly enough to make investors forget the annual losses posted by those ETFs in three of the past four years. [Returning to Emerging Markets ETFs]

Previous laggards can rebound to become winners and that is the thesis some are applying to the second-quarter outlook for emerging markets stocks.

“EM assets’ performance has been disappointing for almost two years, and EM FX weakness has accelerated in February and March, in part due to strong momentum for the dollar globally and further weakness in key commodities. But the cumulative weakness over the past two years means that FX valuations are now looking quite different. In addition, there are more cyclical factors, which may work in the favor of emerging markets in Q2,” Nomura said in a note posted by Dimitra DeFotis of Barron’s.

There have been pockets of strength this year for emerging markets stocks and ETFs. For example, the Market Vectors Russia ETF (NYSEArca: RSX) is up 15.4% after plunging 42% last year. Making RSX’s performance all the more impressive is oil prices have continued falling. After surging and leading the BRIC quartet last year, India stocks and ETFs are again notching solid performances in 2015. [Russia ETFs may be Turning Around]

However, the MSCI Emerging Markets Index allocates just over 11% of its combined weight to Indian and Russia stocks. On its own, lagging Brazil nearly negates India in the emerging markets benchmark. The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) is off almost 14% this year, but it did pop 7.6% last week.