Well-documented have been the struggles of emerging markets equities this year relative to U.S. stocks. Concerns about global growth, commodities demand, inflation and other issues have plagued developing stocks and, particularly at the ETF level, some of the worst laggards
have also been the largest emerging markets. That roster includes the four BRIC nations along with South Korea and Taiwan.
Still, investors are putting some cash to work in emerging markets ETFs, though at a much slower clip than what was seen last year. In 2012, emerging markets ETFs and ETNs raked in $30.5 billion in capital, but that figure was just $4.6 billion in the first quarter after outflows of $4.7 billion in March alone,
according to BlackRock data.
Investors are also eschewing country-specific funds in favor of diversified emerging markets ETFs, though the iShares MSCI Mexico Investable Market Index Fund (NYSE:
EWW) gained $1.2 billion in inflows. Despite the struggles of the broader emerging markets group, some analysts see opportunity within the asset class.
S&P Capital IQ "believes that the expected stronger economic growth is driven by better demographic trends; lower worker to retiree ratios; a growing middle class; rapid urbanization, which fuels infrastructure spending and raw material demand; and natural resource wealth," the research firm said in a new note.
Beyond the BRIC quartet of Brazil, Russia, India and China S&P Capital IQ "advises casting a wide net to include lower-profile markets like Indonesia, Turkey and Mexico where performance has been much stronger than the BRIC markets in recent years, reflecting steadier growth, lower inflation and an uptick in investor interest."
In the note, S&P Capital IQ highlighted six diversified emerging markets ETFs, but only one earned an Overweight rating, the iShares Core MSCI Emerging Markets ETF (NYSE:
IEMG). IEMG debuted last October as part of the new core series of ETFs from iShares aimed at cost-conscious investors. Rather than lower the fees on the iShares MSCI Emerging Markets Index Fund (NYSE:
EEM) to be comparable to the rival Vanguard FTSE Emerging Markets ETF (NYSE:
VWO), iShares created IEMG.
It is hard to argue with the success iShares has had with the new fund. In just seven months, IEMG's low expense ratio of 0.18 percent has helped the fund attracted almost $915 million in assets,
according to iShares datahas permeated developing world funds as well. S&P has a Marketweight rating on the PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSE:
EELVTUR) is up seven percent year-to-date and was one of the top-performing emerging markets ETFs last year.
The iShares MSCI Indonesia Investable Market Index Fund (NYSE:
EIDO) also earned an Underweight rating from S&P, though that ETF has surged 10.7 percent on a year-to-date basis. EIDO and rival Indonesia ETFs have been buoyed by the country's
strong domestic demand story.
Indonesia, the world's fourth-largest country by population, is expected to post GDP growth this year of 6.25 percent this year, up slightly from 6.23 percent in 2012. Amid rising inflation and slack materials demand, the Jakarta Composite and EIDO will likely need strong contributions from discretionary and staples shares to continue to the upside.
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