Words of Caution on Emerging Markets ETFs

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 in rally mode. VWO and EEM are up an average of 6.4% over the past month, but some market observers see reasons for caution in this emerging markets rally.

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]

Although big-name emerging markets have recently been strong, that strength has not been enough to convince some market observers that this is no more than a rally locked within a lengthy bear market.

“Along with news out of China, the bounce in oil has helped emerging markets, said Gina Sanchez of Chantico Global. However, ‘neither of those are actually good enough reasons to dive into emerging markets right now. They are falling knives,’ she said in an interview with CNBC earlier this week.