In what has been mostly a good year for emerging markets equities, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), the largest emerging markets exchange traded fund by assets, is higher by 10.5%.
VWO, a favorite among frugal investors and advisors alike due to its paltry annual fee, has the potential to deliver again in 2017.
Investors can still find some areas of opportunity, such as the emerging markets. The emerging markets have recently picked up momentum after years of underperforming developed markets, and the global segment remains relatively attractive.
Emerging markets remain attractively priced, with VWO showing a 13.7 price-to-earnings ratio and a 1.5 price-to-book. Emerging market assets have already struggled and may be past their lowest point. The EM segment could slowly improve from here with strengthening current account balances, rising commodity prices and better fundamentals.
Investors should note that VWO is adding China A-shares to its lineup. VWO does not track an MSCI index and that index provider is still mulling the inclusions of China A-shares to its emerging markets benchmarks.
VWO “tracks the return of the FTSE Emerging Markets All Cap China A Transition Index. The ‘transition’ basically refers to the fact that, as Vanguard words it, the ETF ‘over time will build exposure to small-capitalization stocks and China A-shares.’ However, they are doing so in a manner, which will minimize the transaction costs associated with this endeavor,” according to a Seeking Alpha analysis of the ETF.
A number of factors support the emerging market outlook. For instance, the global economy is stabilizing, notably a steadier China, has helped diminish some of the cyclical headwinds and improved the near-term outlook for many developing countries, according to Fidelity.
Global trade and manufacturing activity have also picked while commodity prices improved, contributing to more favorable outlook for the emerging market business cycle and corporate earnings outlook.
VWO “currently contains a whopping 4,300 holdings, with the Top 10 comprising a mere 16.50% of its assets” and “carries an expense ratio of .15%, once again impressive for an ETF which provides exposure to emerging markets, with all associated trading costs,” according to Seeking Alpha.
For more information on the developing economies, visit our emerging markets category.