Craving Emerging Markets? Don't Pick Just Any ETF
Amid compelling valuations in specific countries, China and India for example, and in the broader universe, emerging markets are looking attractive again. Year-to-date, the SPDR S&P 500 (NYSE: SPY) has outpaced the iShares MSCI Emerging Markets Index Fund (NYSE: EEM) by about 480 basis points.
That trend may be set to reverse course, and as the Wall Street Journal reported on Thursday, some professional investors are already trimming exposure to U.S. equities in favor of emerging market fare.
At the ETF level, the proof is in the pudding. Emerging markets ETFs have raked in $9 billion in assets just since the end of August with EEM gaining $1 billion, the iShares FTSE China 25 Index Fund (NSYE: FXI) hauling in $662.7 million and the iShares MSCI Brazil Index Fund (NYSE: EWZ) raking in $489.3 million, according to ETF Trends.
While money is flowing into emerging markets ETFs, it pays to remember throwing money at any old fund is not a winning strategy. Nor is relying on funds such as EEM or the Vanguard MSCI Emerging Markets ETF (NYSE: VWO) to capture the best gains. Here are some ideas for emerging market ETFs that have the potential to outperform as investors pump cash into the asset class.
iShares MSCI Emerging Markets Minimum Volatility Index Fund (NYSE: EEMV) Now a year old, the iShares MSCI Emerging Markets Minimum Volatility Index Fund has proven to be a prodigious gatherer of assets with $546.5 million in assets under management. EEMV has also proven to be a multi-country developing markets play than EEM or VWO. Year-to-date, EEMV has outpaced its two larger rivals by about 600 basis points each.
Investors looking for Latin America exposure might want to consider pairing EEMV with an ETF with heavier allocations to that region. Brazil, Chile and Colombia combine for less than 17 percent of EEMV's weight.
Global X FTSE Colombia 20 ETF (NYSE: GXG) Speaking of Latin America, as was mentioned earlier, money has been flowing into EWZ. However, EWZ and other Brazil ETFs are the "usual suspects" of the Latin American investment thesis. Year-to-date, GXG has simply embarrassed EWZ in terms of returns with the former up 25.2 percent and the latter in the red.
More importantly, GXG has shown good relative strength compared to EWZ in the past month. It may feel like EWZ is moving higher, but in the past month, that ETF is off 1.8 percent while GXG is up 6.6 percent. Colombia is now South America's second-largest economy and its debt burden is declining.
The ETF's P/E ratio is just under 17.5 and its price-to-book ratio is 1.49. Those numbers compare favorably with EEM. In other words, investors can grab GXG at a comparable valuation to EEM and likely expect better returns in near- to medium-term.
iShares MSCI Philippines Investable Market Index Fund (NYSE: EPHE) With a gain of almost 33 percent this year, the iShares MSCI Philippines Investable Market Index Fund has been one of the top-performing country-specific ETFs. EPHE has over $132 million in AUM, indicating it will certainly survive, but considering the strength in Philippine equities this year, that AUM figure says a lot of investors are missing out on the the good news story that is the Philippines.
Favorable demographics and a strong government balance sheet bode well for the long-term outlook with the Philippines. EPHE trades at a premium to the broader emerging markets universe, but the premium is justified based on past performance and future potential.
Investors should note EPHE is not the China play many would assume it is by looking at a map. Over the past six months, the ETF's correlation to the SPDR S&P China ETF (NYSE: GXC) is just 0.63, according to State Street data.
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