While the Chinese economy slowed, commodity prices plunged and the Federal Reserve postured on its rate outlook, emerging markets and related exchange traded funds have been selling off, potentially opening an opportunity for contrarian investors.
“In 35 years of covering these markets, I can’t recall such blanket bearishness,” Allan Conway, a manager specializing in emerging and frontier market equities at Schroder Investment Management, told Bloomberg. “We are ripe for a significant rally.”
For instance, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and iShares MSCI Emerging Markets ETF (NYSEArca: EEM) both declined about 14.6% year-to-date. The two funds are also among the most unwanted trades of 2015, with VWO seeing $6.6 billion in redemptions and EEM losing $2.8 billion to outflows. [Major ETF Trends of 2015]
Anindya Chatterjee, who manages the City National Rochdale Emerging Markets Fund, which outperformed 90% of its peers, pointed to pockets of strength, notably in Asian countries like China and India where the economies are benefiting from a rising middle class.
“We’re in the sweet spot,” Chatterjee said told Bloomberg. “Whether it is toothpaste or cars, people are spending more money as their incomes grow.”
Chatterjee has stuck with Asian markets because of their greater potential and better demographics. For instance, Chinese equities made up 42% of his portfolio as of September 30, followed by 26% India. Additionally, Chatterjee focused Chinese online companies.
“We took a leap of faith because we knew how much potential there was in e-commerce,” Chatterjee added.
ETF investors can also gain targeted exposure to these two emerging markets. For India exposure, investors can take a look at the iPath MSCI India ETN (NYSEArca: INP), PowerShares India Portfolio (NYSEArca: PIN) and WisdomTree India Earnings ETF (NYSE: EPI).
Looking at China ETF options, the iShares China Large-Cap ETF (NYSEArca: FXI) and SPDR S&P China ETF (NYSEArca: GXC) both track Chinese companies listed on the Hong Kong stock exchange. Additionally, investors can use China A-shares ETFs that track mainland Chinese stocks traded in Shanghai and Shenzhen plunged Friday, with the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR).
Additionally, investors can focus more on China’s tech space through the broader Powershares Golden Dragon China Portfolio (NYSEArca: PGJ), which includes a hefty 44.3% tilt toward information technology companies, or the more sector-specific KraneShares CSI China Internet ETF (NasdaqGM: KWEB). [Even After a Flop, China ETFs Lead in 2015]
Alternatively, for broader emerging Asia exposure, investors can take a look at options like the Global X FTSE ASEAN 40 ETF (NYSEArca: ASEA), SPDR S&P Emerging Asia Pacific ETF (NYSEArca: GMF) and iShares MSCI Emerging Markets Asia ETF (NYSEArca: EEMA).
ASEA leans toward southeast Asian economies, including Singapore 37.1%, Malaysia 26.2%, Indonesia 16.0%, Thailand 15.7% and Philippines 5.1%.
GMF focuses on emerging Asia Pacific countries, including China 46.3%, Taiwan 20.0%, India 17.8%, Malaysia 4.6%, Thailand 4.0%, Indonesia 3.7% and Philippines 2.6%.
EEMA also includes Asia Pacific exposure, except the MSCI categorizes South Korea as an emerging economy. Country weights include China 36.5%, South Korea 21.5%, Taiwan 16.6%, India 11.9%, Malaysia 4.5%, Indonesia 3.5%, Thailand 2.8% and Philippines 2.0%.
For more information on the developing economies, visit our emerging markets category.
Max Chen contributed to this article.