4 Emerging Market ETFs With Compelling Valuations
Broadly speaking, emerging market ETFs have not impressed this year. Many emerging market funds got off to stellar starts, surging in January and February, but those flames have burned out. Over the past 30 and 90 days, the returns offered by many emerging market ETFs have failed to impress.
Bargain hunters that like to go shopping using traditional valuation metrics, such as price/earnings and price/book ratios, have plenty of funds to choose from that can be considered inexpensive.
That is inexpensive relative to the broader developing nations universe as measured by the iShares MSCI Emerging Markets Index Fund (NYSE: EEM) or the Vanguard MSCI Emerging Markets ETF (NYSE: VWO). EEM, the second-largest emerging markets ETF by assets behind VWO, currently trades at almost 15.5 times earnings with a price/book ratio of 2.74, according to iShares data.
Of course, the trick goes beyond finding those funds that beat EEM on those metrics. The real task is finding ETFs with superior valuations and better chances for capital appreciation. Here are a few to consider:
SPDR S&P China ETF (NYSE: GXC) China bulls have had belted out a familiar refrain this year: Chinese equities are cheap on a valuation basis. GXC's numbers support that assertion. This $813 million fund, which is often overshadowed by the iShares FTSE China 25 Index Fund (NYSE: FXI), has a P/E of less than 9.2 and trades at 1.52 times book value.
Those are clearly more attractive numbers than what EEM offers. However, GXC shares the same price/book ratio with FXI, but the SPDR fund has the lower P/E ratio. Not to mention GXC is up 4.6 percent year-to-date while FXI is up just half a percent.
Market Vectors Russia ETF (NYSE: RSX) Amid slumping oil prices, Russian stocks have been slammed. In the past 90 days, the Market Vectors Russia ETF has given up 19 percent. That is better than the 22.7 lost by the U.S. Brent Oil Fund, (NYSE: BNO) but RSX is trading at a P/E that is so low it is not going unnoticed.
Russia is the largest non-OPEC oil producer, so it is accurate to say RSX and the other Russian ETFs need an oil rebound to trade higher. For now, investors should consider the fact that at the end of May, RSX had a forward P/E of 7.7 on a weighted average basis and 5.5 based on the harmonic average, according to Market Vectors data.
iShares MSCI Poland Investable Market Index Fund (NYSE: EPOL) Poland is still co-hosting the 2012 UEFA Euro Finals, but the Polish national team has been bounced from the tournament after not even making it past the group stage. Football aside, Poland has been knocked down by its proximity to the Eurozone.
Additionally, Poland is not an export-driven economy, meaning it is far less beholden to the economic travails of the PIIGS than outsiders would expect. That is good news for EPOL's long-term prospects. It is worth noting that the ETF trades at 10.5 times earnings and 1.48 times the weighted average book value of its components. Also consider the Market Vectors Poland ETF (NYSE: PLND).
SPDR S&P Emerging Latin America ETF (NYSE: GML) The SPDR S&P Emerging Latin America ETF could easily be the one ETF on this list that deserves a warning. GML's risk is easy to explain. For starters, a combined 30 percent of its sector weight goes to materials and energy names. Second, and more importantly, there is the 58% allocation to Brazil.
Yes, GML's valuation metrics (10.9 P/E and 1.55 price/book) look nice, but the same sentiment cannot be extended to Brazil at the moment. The country is plagued by inflation concerns and a plunging real. Global investors may dislike the impact the country's government has had on business. Further, Brazilian oil giant Petrobras (NYSE: PBR) is arguably the worst oil stock in the world. All these factors combine to make any ETF with a large weight to Brazil high-risk.
For more on ETFs with low P/E ratios, click here.
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