Commodity prices historically benefit emerging market (EM) economies, but that hasn’t been the case as of late despite rising prices amid rampant inflation.
Typically, countries that have those particular commodities that are rising can reap the rewards from the bottom line. However, that hasn’t been the case since rising prices aren’t the result of higher demand, but supply shocks.
“Clearly, supply may decline on the possibility of more sanctions by other European nations,” a Barron’s article notes. “In other words, the commodity surge is driven in large part by a supply shock, not entirely by strong demand. And the higher commodity prices—oil spikes show up at the pump—can eventually destroy demand.”
Of course, the most recent supply shock has been with oil. Russia’s invasion of Ukraine saw oil prices skyrocket as Western sanctions rained down on Russia.
EM as a whole shows a loss of 12% for the year, according to the MSCI Emerging Markets index. While EM can still offer investors growth potential, investors have to be discerning when looking to add EM to their respective portfolios.
Mitigate Volatility in Emerging Markets
Given the tricky environment in emerging markets, it’s necessary to mitigate volatility. One way is via funds that screen for liquidity and low volatility such as the First Trust Emerging Markets Equity Select ETF (RNEM).
The fund seeks investment results that correspond generally to the price and yield of the Nasdaq Riskalyze Emerging Markets Index. The index is a modified market capitalization-weighted index which seeks to provide a diversified portfolio of low-volatility securities.
The index selects securities from the Nasdaq Emerging Markets Large Mid Cap Index based on factors like liquidity and volatility. For eligibility into the index, securities must include a minimum three-month average daily dollar trading volume of $5 million, and a trading history on an eligible exchange for at least one calendar year.
Eligible securities are ranked by trailing 12-month volatility within their respective countries. The 25 securities with the lowest volatility from each country are selected (or all securities if less than 25 qualify).
Weights are assigned that are equal to the country and sector weights within the Nasdaq Emerging Markets Large Mid Cap Index. The index weighting methodology includes a maximum weight cap of 3% to prevent high concentrations among larger stocks.
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