Emerging markets stocks and emerging markets ETFs, such as the Vanguard FTSE Emerging Markets Index ETF (NYSEArca: VWO), have been pinched this year by a stronger U.S. dollar. VWO, the largest emerging markets ETF by assets, is down about 5% year-to-date.
Conversely, the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), which tracks the USD’s movements against a basket of major developed currencies, is higher by about 4%.
Despite the relative weakness year-to-date in emerging markets ETFs, other market experts may view them as underpriced based on a price-to-estimated earnings ratio that is at its lowest within the last two years. The ratio for the MSCI Emerging Markets Index is below its historical average of 11.4, reaching about 11.2–signs that possible buying opportunities exist.
“Emerging market (EM) equities have underperformed both US and developed international markets in 2018. The FTSE Emerging Index has declined 7.2% YTD compared to a 3.9% decline for the FTSE Developed ex US Index and a 6.2% rise for the Russell 1000 Index over the same time period,” according to FTSE Russell, VWO’s index provider.
Trade Troubles for Emerging Markets
Amid trade war speculation, Chinese stocks are floundering, pressuring an array of cap-weighted emerging markets ETFs that feature significant weights to the world’s second-largest economy. China is by far VWO’s largest country weight.
“Along with simmering trade tensions, US dollar strength has been among the biggest emerging markets headwinds this year as it’s lured capital away from developing nations. A firm greenback also makes developing nations’ dollar denominated debt more expensive to service,” said FTSE Russell Managing Director Alec Young.