Time to Rethink Emerging Markets ETFs

  • Largest emerging markets ETFs by assets – VWO and EEM – up average of 3% this year
  • Both have posted double-digit gains over the past several weeks
  • Commodities prices are rebounding, in turn bolstering some emerging economies

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, are up an average of about 3% this year and have posted double-digit gains over the past several weeks.

Those performances are notably better than what investors have become accustomed with emerging markets exchange traded funds in recent years, but even with the recent bullishness for these funds and others, some see emerging markets equities as still oversold.

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.

“We started this move earlier this week by placing 5% in EEM, a broad mix of emerging markets. More interesting is to focus on commodity producers/basket-case countries/currencies. South America comes to mind, especially Brazil. We looked at Brazil twelve months ago and decided it was too early. Now may be the time, as the corruption investigation moves toward resolution and increasingly looks like it could bring a new government to power. Argentina has just changed governments and cleaned up its long running debt market problem,” according to a note from TIS Group posted by Dimitra DeFotis of Barron’s.

Although still China and its slowing economic growth loom large for emerging markets ETFs, rebounding oil prices have boosted shares of Russian stocks while anti-corruption probes in Brazil have helped stocks in Latin America’s largest economy rally.

It appears some investors still need some convincing regarding the veracity of the emerging markets rally as EEM and VWO have, on a combined basis, lost more than $2 billion in assets this year.