Amid increasing trade tensions between the U.S. and China, it is not surprising the MSCI Emerging Markets Index is feeling some pain this month. However, risk-tolerant investors may want to revisit exchange traded funds, such as the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) or iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG), to position for a rebound in developing world equities.
“Reasons for caution are everywhere. Developing-nation stocks are headed toward their worst month since October, while 21 out of 24 currencies tracked by Bloomberg are down in May as investors scale back their exposure to risk,” reports Bloomberg.
Investors are increasingly emphasizing low cost a prime motivator for allocating capital in 2019, which makes ETFs like IEMG an attractive option. The fund provides this core EM exposure at a paltry 0.14 percent expense ratio.
IEMG tracks the cap-weighted MSCI Emerging Markets Investable Market Index and holds over 2,200 stocks. IEMG debuted in October 2012 as part of the iShares lineup of core ETFs targeted at cost-conscious buy-and-hold investors.
Signs of Life in Emerging Markets
Investors are beginning to look at EM opportunities as substantial markdowns, especially if trade negotiations between the U.S. and China result into something materially positive. From a fundamental standpoint, low price-to-earnings ratios in emerging markets ETFs have made them prime value plays as capital inflows continue.
IEMG’s geographic lineup is similar to the MSCI Emerging Markets Index as the fund devotes over 56% of its combined weight to China, South Korea and Taiwan. Later this year, Argentina and Saudi Arabia join the MSCI Emerging Markets Index, meaning IEMG will eventually feature exposure to those countries.
“In equities, JPMorgan Asset Management says it makes sense to bet on companies that depend more on the domestic market and are, therefore, protected to some extent from a trade slowdown,” according to Bloomberg.
In the second quarter, two of the top four ETFs in terms of assets lost are emerging markets funds.
“Flows into emerging markets are highly sensitive to external risk factors such as global growth, changes in monetary policy in the U.S. and a general market sell-off,” according to CNBC. “Add to that domestic factors such as high current account deficits, weak currencies and a dependence on commodities, then these markets can make for a risky investment.”
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