The Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), the two largest emerging markets exchange traded funds by assets, each gained about 2% on heavy volume Thursday, but one sanguine day does not obfuscate potential technical trouble ahead.
Even with Thursday’s upside, EEM and VWO are both down more than 7% over the past month and investors have not been shy about departing from the former. Since the start of this month, more than $1.5 billion has been yanked from EEM. Year-to-date, the fund has lost over $5 billion. [Investors Ditch EM ETFs]
“EEM doesn’t have much to brag about since 2007, as it’s down 30% from its highs. It doesn’t have much to brag about the past three years either as it’s at the same price as it was in 2012, while so many market are much higher than 2012,” according to Chris Kimble of Kimble Charting Solutions.
Fueling the recent selling, speculators anticipate the Federal Reserve to hike interest rates, which would add further pressure on emerging currencies, weigh on exporting countries where current accounts could shrink and diminish foreign market returns.
Although China, EEM’s largest country weight at almost 22.2%, has been dominating emerging markets headlines in recent weeks, it is not the only culprit behind EEM’s woes. The iShares MSCI South Korea Capped ETF (NYSEArca: EWY) and the iShares MSCI Taiwan ETF (NYSEArca: EWT) are down an average of 3.4% over the past month and barely reside above their recently touched 52-week lows. South Korea and Taiwan combine for 27.4% of EEM’s weight.
Despite the recent pullback, Barclays also argues that China should support the case for emerging markets, since the country “has greater potential for significant and sustained effects on global markets.” [ETF Plays to Capture Growth in Emerging Asia]
“EEM is testing sideways channel support at. So far it’s been a good place to buy EEM on this support line. Will it be different this time? If channel support would happen to give way, Emerging markets could turn into ‘Sub-merging’ markets, as frustrated owners of the ETF could ramp up selling of shares,” adds Kimble
iShares MSCI Emerging Markets ETF
Chart Courtesy: Kimble Charting Solutions
Tom Lydon’s clients own shares of EEM.