Diversified Emerging Markets ETFs With Rebound Potential
More than eight months into the year, investors by now know the sad song sung by a plethora of emerging markets ETFs.
Price decay among emerging markets ETFs has seemingly known no bounds as bond, currency, equity-based, diversified and single country funds have slumped.
With about four months left in 2013, there are two clear, but diverging viewpoints on near- to medium-term outlook for emerging markets equities. One group believes widening account deficits, tumbling currencies and other factors will continue to plague once high-flying markets like India and Indonesia. The other group believes that the under-performance of developing world stocks relative to U.S. shares is bound to end soon as investors embrace compelling valuations.
Both groups could be vindicated, but the bulls will fair treatment here as will the bears in another piece. Some emerging markets ETFs are already showing signs of life, indicating investors will want to keep an eye on the following multi-country funds.
Related: Some EM ETFs Were Pretty Good In August.
First Trust Emerging Markets AlphaDEX Fund (NYSE: FEM)
The First Trust Emerging Markets AlphaDEX Fund is an ideal ETF for the investor that wants ample China exposure, even more than is offered in large diversified emerging markets ETFs, without the commitment of a single-country fund. Additionally, FEM's 153 holdings have a median market value of just $5.1 billion, which shows the fund is not excessively exposed to state-controlled companies.
China checks in at 31.4 percent of the FEM's weight, which is not a problem with Chinese stocks soaring as they currently are. The question is what other countries will contribute to FEM's upside? It will have to be some combination of Brazil, Turkey, Thailand, Mexico and Poland, a group that combines for over 37 percent of FEM's weight.
The prospect of Turkey and Thailand doing the heavy lifting appears dubious at the moment. Good news for valuation fanatics: FEM is cheap, even by the current low bar set by the broader emerging markets universe. FEM has a P/E ratio below nine and a price-to-book ratio below 1.2, according to First Trust data.
WisdomTree Middle East Dividend Fund (NASDAQ: GULF)
The WisdomTree Middle East Dividend Fund is not a pure emerging markets ETF because Qatar and the United Arab Emirates, almost 56 percent of the fund's weight, still have until May 2014 before making the jump to emerging markets status.
GULF is off 6.6 percent in the past month due to two primary factors. First, investors have started to believe that stocks in Dubai became too richly valued in the run-up to the emerging markets promotion. Second, the situation in Syria has amplified volatility for ETFs with exposure to Middle East stocks.
The Syria-induced decline has created a scenario where some of the hot money is getting shaken out of Dubai stocks, creating an opportunity for investors that realize the long-term potential of investing in Gulf Cooperation Council states. Investors are compensated for the risk with under-appreciated dividends. GULF's 30-day SEC yield is 5.23 percent.
PowerShares S&P Emerging Markets Low Volatility ETF (NYSE: EELV)
EELV is already showing signs of being a legitimate rebound play with an almost three percent gain in the past week. The fund has a few other things in its favor, including no significant exposure to India and Indonesia. Simply put, "low volatility" and those markets do not belong in the same sentence.
The obvious hurdle EELV has to deal with is its almost 17 percent weight to Malaysia, the fund's second-largest country weight behind Taiwan. Normally low beta compared to other emerging markets, Malaysia is home to deteriorating credit quality and immense structural issues, two factors that could prompt increased capital flight.
EELV is buffered by exposure to Taiwan, Chile and South Korea, to name a few. In another sign of EELV is on the right track, it is one of a scant number of emerging markets ETFs to see net inflows this year. In fact, EELV's assets under management tally has grown more than two and a half times this year.
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