Look to Emerging Market ETFs in the Second Half | ETF Trends

As the U.S. equities market begins to slowdown, investors should consider emerging market exchange traded funds to capture potentially more attractive growth opportunities.

“More competitive currencies, lower energy costs and aggressive monetary policy easing are combining to provide a solid underpinning for growth,” Barclays said in its June 2015 outlook, CNBC reports.

The prolonged underperformance and cheap valuations in the emerging markets provide more running room for the asset category.

For instance, the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) has generated an average annual return of 2.4% over the past five years while the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) returned an average 3.4%. Meanwhile, the S&P 500 saw an average annual return of 16.7% over the past five years.

Moreover, EEM is trading at a price-to-earnings ratio of 13.1 and a price-to-book of 1.6, and VWO shows a 13.9 P/E and 1.7 P/B, whereas the S&P 500 has a 18.6 P/E and 2.6 P/B.

“Emerging Market equities have underperformed global equities since 2010 and during the first half of 2015,” according to Barclays. “Valuations are attractive relative to developed market equities, while acceleration in global economic growth should improve the outlook for their earnings. Sentiment is negative.”

The firm also expects better growth prospects in the developing economies, projecting a 12% earnings growth in emerging markets, compared to a 7% earnings growth in the U.S.

However, Barclays warned that investors should not treat all emerging countries equally. For instance, Brazil, which Barclays expects to bottom out soon, is in a correction, along with Greece, Russia and China.