Selectivity Required With Emerging Markets ETFs | ETF Trends

A variety of factors, including but not limited to rising interest rates in the U.S. and Russia’s war against Ukraine, are hindering emerging markets stocks and exchange traded funds this year.

Those scenarios, among others, remind investors that selectivity is key with emerging markets ETFs. So does the 17.44% year-to-date decline by the MSCI Emerging Markets Index. However, risk-tolerant investors and bargain hunters alike may want to monitor the Emerging Markets Internet & Ecommerce ETF (NYSEArca: EMQQ).

As its name implies, EMQQ is heavy on growth stocks — the very corner of emerging markets that is being plagued by U.S. rate tightening. Fortunately, that doesn’t mean that the fundamental story is dead for EMQQ components.

“The relative underperformers are the highest-growth, highest-valuation segments of the market, such as healthcare, technology, and media and entertainment. Nothing is structurally broken in those industries, but they are growing into their valuations. Many are struggling to pull forward some of the COVID benefits they received over the past two years,” according to William Blair.

Regarding geographic exposures, EMQQ isn’t heavily allocated to commodities beneficiaries, which isn’t surprising given the fund’s underlying investment objective. At the end of the first quarter, it allocated about three-quarters of its weight to China, India, and South Korea, according to issuer data.

Said another way, aside from a 0.59% allocation to Poland, EMQQ’s direct exposure to Eastern European equity markets is non-existent, and these days, that’s a positive.

“The conflict in Ukraine likely bodes poorly for Eastern Europe more broadly, expanding beyond Russia to Hungary, Poland, and other countries in the region,” added William Blair. “There are several reasons for this: Eastern Europe is very dependent on energy imports from Russia; it is dealing with a refugee crisis from Ukraine; inflation has accelerated; currencies are under pressure; and interest rates have increased. Generally, then, we have a cautious view of central and eastern Europe.”

In Asia, EMQQ’s roughly 53% weight to Chinese stocks is obviously meaningful. Once again, stocks in the world’s second-largest economy are disappointing this year. However, China isn’t bereft of catalysts. William Blair argues that China could be one of a small number or the only major economy to lower interest rates this year. Additionally, it’s possible that Beijing rethinks its zero-COVID policy. No guarantees on those fronts, but either could act as a catalyst for EMQQ’s China holdings.

For more news, information, and strategy, visit our Emerging Markets Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.