The U.S.-China trade impasse might be adding a heavier dosage of volatility that investors may not be used to since the start of 2019, but it is making emerging markets (EM) exchange-traded funds (ETFs) an even more attractive option given their relative discounts to broader indexes like the S&P 500.
While most investors might have been driven away by the red prices in emerging markets (EM) during much of 2018, savvy investors who were quick to see the opportunity viewed EM as a substantial markdown. From a fundamental standpoint, low price-to-earnings ratios in emerging markets ETFs have made them prime value plays as capital inflows continue in 2019.
“Emerging markets have been so unloved lately,” noted Morningstar’s senior analyst for equity strategies, Christopher Franz. “This would be a great time for investors to rebalance EM stocks back into their portfolio.”
Ongoing U.S.-China trade negotiations and geopolitical tensions put emerging markets in a state of unease in 2018, but investors can now look to their resurgence through other broad-exposure ETFs like the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) or iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG).
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.
The cheaper price and more technology provide the tailwinds emerging markets need for more growth in the future. With ETFs being the investment of choice for younger, nascent investors, that trend could continue in developing countries.
“We’re seeing young people in developing countries with entrepreneurial drive who are increasingly getting connected to the internet,” said Richard Sneller, head of emerging markets equity for Baillie Gifford. “It will be the most exciting growth stage in emerging markets over the next 10 years.”
Getting Active in China
China is becoming less resistant to safeguarding its businesses, which will open the pathways to more foreign investment. China ETFs have also been the beneficiaries of index provider MSCI Inc. announcing recently that it would quadruple its weighting of large-cap Chinese shares in its benchmark indexes.
In addition, as China becomes more open to adopting actively-managed ETFs, that space could also see growth in the world’s second largest economy.
“Asset managers around the world are looking for ways to tap China’s potential; I believe more ETF issuers will draw on active ETFs as a preferred channel to enter China,” says Deborah Fuhr, managing partner and founder of ETFGI. “Being able to launch products domiciled in Hong Kong, with the idea that they can expand their footprints in China’s market, is a compelling proposition for many large asset managers.”
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