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, are just two of the big-name emerging markets ETFs that are struggling this year.
But in the essence of fairness, it must be noted these emerging markets ETFs and others like them have recently seen some upside. For example, EEM, the second-largest emerging markets ETF, has gained over 6% over the past month.
Some fund managers believe it will be a while before emerging markets stocks recover in earnest. Investors pulled out of riskier emerging markets as data showed growth from China’s economy slowed, commodity prices fell and the Federal Reserve signaled an interest rate hike this year. The China slowdown is fueling the lower commodity prices and lower outlook for other major emerging economies. Moreover, rising borrowing costs, a stronger dollar and rising corporate debt loads, with the International Monetary Fund warning of corporate defaults, are adding to volatility. [Area Emerging Market ETF Investors Must Monitor]
Investors should look at the emerging market equities as a more cyclical asset. Currently, after years of outperformance in the developed markets, the emerging markets are beginning to show a lower premium to more developed countries. [Look to Emerging Market ETFs in the Second Half]
The recent uptick in emerging markets ETFs could give way to technical retrenchment in the eyes of some technical analysts.
“Following a five-wave pattern, we should see at least a three-wave pullback and following a finished corrective sequence – the 3-3-5 pattern – we should see a new impulse with the main trend, ideally into new lows,” according to TradingFloor.com. “Looking at the daily chart, we have two gaps in the most recent rise: the one at 34.60 from October 6 and one at 33.90 set through the weekend following October 2. These could work as magnets in case of a pullback and should be overcome if we are in for a new bear swing lower.”
Emerging market stocks and related exchange traded funds have strengthened on the prospects that the Federal Reserve would hold off on an interest rate hike and increased stimulus from China would stabilize growth, but the asset class may have a hard time sustaining the rally.
iShares MSCI Emerging Markets ETF
Tom Lydon’s clients own shares of EEM.