ETF Trends
ETF Trends
  • Two largest emerging markets ETFS by assets – VWO and EEM – have each posted double-digit gains over the past month
  • Technical analysts see more upside brewing for developing world benchmarks
  • Observers acknowledge emerging markets appear inexpensive because earnings growth is contracting with little sign of rebounding in the near-term

The Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), two largest emerging markets exchange traded funds by assets, have each posted double-digit gains over the past month. While the two titans of emerging markets ETFs have pulled back a bit in recent days, technical analysts see more upside brewing for developing world benchmarks.

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]

However, commodities prices are rebounding, in turn bolstering some emerging economies, such as Russia, Brazil and other Latin American nations that are represented in EEM and VWO. Still, some market observers acknowledge emerging markets appear inexpensive because earnings growth is contracting with little sign of rebounding in the near-term.

Regarding EEM, “the ETF has moved above a short-term declining trendline and its 50-day moving average. Momentum indicators are strong and cumulative volume is heading modestly higher. In other words, it is a real rally. Still, questions remain about its sustainability,” reports Michael Kahn for Barron’s.

India, Asia’s third-largest economy, is widely believed to be one of the sturdier emerging markets, but U.S.-listed ETFs tracking Indian stocks have struggled over the past year. Over the short-term, India has benefited from cheap energy prices as the country is one of the largest importers of crude oil. Looking further out, economic reforms, including more business-friendly and growth-oriented policies, could help support growth over the medium-term. India is another integral member of major emerging markets ETFs, including EEM and VWO.

“Basically, we cannot lump all emerging markets together. So while the emerging markets ETF looks as if it can tack on another 10-11% as it heads towards very strong resistance at the bottom of its old trading range, its reliance on energy and precious metals should give pause,” adds Barron’s.

iShares MSCI Emerging Markets ETF

Tom Lydon’s clients own shares of EEM.