Market Overview

Focusing On A Cheap Emerging Markets ETF

Focusing On A Cheap Emerging Markets ETF

For the bulk of 2018, emerging markets equities have been laggards. The widely followed MSCI Emerging Markets Index is sitting on a year-to-date loss north of 11 percent.

A bad year is never a guarantee of better things the next year, but some market observers are betting emerging markets stocks and exchange traded funds will deliver some upside for investors in 2019.

What Happened

Eyeing a potential emerging markets rebound in 2019, CFRA Research anointed the SPDR Portfolio Emerging Markets ETF (NYSE: SPEM) as its focus ETF for the month of December.

SPEM tracks the S&P  Emerging BMI Index, not the MSCI Emerging Markets Index. A key difference between those benchmarks is that S&P doesn't classify South Korea as an emerging market while MSCI does. Lack of South Korea exposure is helping SPEM this year as the ETF has been about 140 basis points less bad than the MSCI Emerging Markets Index.

“CFRA thinks investors should and will continue to allocate to emerging market equities for 2019 and we think SPEM provides an appealing portfolio with low management and trading costs,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a Thursday note.

Why It's Important

SPEM, which holds nearly 1,400 stocks, is heavily allocated to the Asia-Pacific region even though the fund does not include South Korean stocks. China, Taiwan and India are SPEM's top three geographic exposures, combining for over 59 percent of the fund's weight.

“In October, CFRA shifted its top-down outlook for the Asia Pacific (ex Japan) market to Overweight, citing an attractive P/E multiple relative to historic levels and with an expectation of 10% EPS growth,” said Rosenbluth. “Additional potential drivers of emerging market Asian performance include traction for China's fiscal stimulus announced in July gaining traction; a steepening Chinese yield curve indicating rising growth expectations; and pressure on the U.S. dollar.”

CFRA is bullish on some SPEM holdings, including some of the fund's marquee constituents.

“From a bottom-up perspective, CFRA finds the securities inside SPEM to be appealing. Indeed, six of the top-10 recent holdings are CFRA Strong Buy or Buy recommendations, one is a Hold and the three others are not rated,” adds Rosenbluth.

What's Next

SPEM charges just 0.11 percent per year, or $11 on a $10,000 investment, making it one of the cheapest emerging markets ETFs on the market.

The ETF has $1.75 billion in assets under management, of which about $967 million have flowed in just this year, making SPEM the second-best asset gatherer among the four cheapest emerging markets ETFs, according to CFRA.

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