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5 Emerging Market ETFs Up Over 20% YTD

After being trapped in a web of difficulties over the past five years, emerging market stocks have had a torrid run over the past two months. In fact, the MSCI Emerging Markets Index is up 6.6% in the year-to-date timeframe and is easily outpacing the gains of 1.8% for the S&P 500 and 0.5% for the MSCI World Index.

Inside The Surge

Most of the gains were driven by stabilization in the Chinese economy, a rebound in commodity prices and the latest wave of interest cuts by emerging-market countries like India, Indonesia, Turkey, Hungary and Taiwan. Notably, Hungry stocks have been the major outperformers following the rate cuts and are hovering around their 9-year highs (read: Hungary Too in the Rate-Cut Club: ETFs in Focus).

The market is expecting more nations to join the interest rate cut league, which would drive the emerging market stocks higher in the coming months. Nigeria and South Africa are expected to cut rates to control their high inflation while Brazil, roiled by inflation and political turmoil, may also follow suit. Moreover, some analysts expect Russia to start easing policies soon despite the fact that inflation has dropped to the lowest level in two years.

Additionally, the cautious stance by the Fed for future rate hikes has injected fresh optimism into the emerging markets. The Fed signaled that interest rates in the U.S. would stay low for some time and has dialed back its projection from four lift-offs to two hikes. This is weighing on the dollar, pulling in more capital into the emerging markets. In fact, the US Dollar Index has weakened nearly 4% so far this year.

Further, as per the data from the Institute of International Finance, capital inflows to emerging markets surged to a 21-month high of $36.8 billion in March, reflecting solid investor confidence in these nations. Latin America gathered the most capital of $13.4 billion, followed by inflows of over $2 billion in Brazil. Investors have been flocking to Brazilian stocks due to attractive valuations and hopes of political change. As a result, the Brazil stocks have popped up 23% so far this year (read: Why Brazil ETFs are Gaining despite Economic and Political Risks?).
 
Added to the stronger case is that emerging market stocks are cheaper than the U.S. stocks at the current levels. This is especially true as MSCI Emerging Markets Index is trading at a P/E ratio of 11.6 versus 17.5 for the S&P 500.

Given this, while many emerging market ETFs have performed remarkably well, we highlight five funds that are leading the space from a year-to-date look and are expected to continue their outperformance provided the fundamentals remain intact.

iShares MSCI All Peru Capped ETF (EPU) – Up 42.0%

This product targets the Peruvian stock market by tracking the MSCI All Peru Capped Index. In total, it holds 26 stocks with concentrated exposure on the top two firms – Credicorp and Southern Copper – with a combined 39.4% share. Other firms do not hold more than 5.70% of assets. About half of the portfolio is dominated by materials, followed by financials at 27.3%. The product has amassed $197.2 million in AUM while trades in average daily volume of 146,000 shares. It charges 64 bps in annual fees and expenses and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook (read: Peru ETF Shining on Gold Rally).
 
iShares MSCI Brazil Capped ETF (EWZ) – Up 38.3%

This fund targets the Brazilian stock market and follows the MSCI Brazil 25/50 Index. Holding 61 stocks in the basket, it is guilty of concentration across the top three firms with over 8% share each while others hold less than 4% of assets. In terms of industrial exposure, financials dominates the fund’s return at 36.4%, followed by consumer staples (18.6%), energy (10.9%) and materials (10.0%). The fund has AUM of $3.1 billion and average daily volume of 20.8 million shares while it charges 64 bps in fees per year from investors. It has a Zacks ETF Rank of 3 with a High risk outlook.

iShares MSCI Turkey ETF (TUR) – Up 23.8%

This product provides a pure play exposure to 69 Turkish stocks by tracking the MSCI Turkey Investable Market Index. It is highly concentrated on the top three firms with a combined 27.4% of assets while other firms hold no more than 5.53% share in the basket. Here again, financials is the top sector at 42.6% of the portfolio while industrials and consumer staples take double-digit exposure each. The fund has amassed around $390 million in its asset base and trades in solid volume of more than 338,000 shares per day in average. The fund charges 64 bps in annual fees from investors and has a Zacks ETF Rank of 3 with a High risk outlook.

Market Vectors Russia Small-Cap ETF (RSXJ) – Up 23.3%

This fund targets the small cap segment of the Russian equity market by tracking the Market Vectors Russia Small-Cap Index. Holding 27 stocks in its basket, the product is largely concentrated on the top 10 holdings at 61%. Utilities and materials are the top sectors with 29.5% and 21.9% share, respectively, followed by financials (16.9%) and industrials (13.2%). RSXJ is unpopular and less liquid having AUM of $43.5 million and average daily volume of 27,000 shares. It charges 68 bps in annual fees and has a Zacks ETF Rank of 4 or ‘Sell’ rating with a High risk outlook (see: all the Broad Emerging Market ETFs here).
 
Global X MSCI Colombia ETF (GXG) – Up 23.2%

With AUM of $86.4 million and average daily volume of $149,000 shares, GXG offers exposure to the Colombian stock market tracking the MSCI All Colombia Capped Index. It holds 29 securities in its basket with the largest allocation going to the top two firms at 15.1% and 8.1%, respectively. Other firms hold less than 5.6% of assets. Financials takes the top spot at 37% while utilities, materials and energy round off the next three spots with double-digit exposure each. Expense ratio came in at 0.61%. The fund has a Zacks ETF Rank of 3 with a Medium risk outlook.

Caveat!

As the deal to freeze oil output at January levels collapsed in the oil exporters meeting held on Sunday, oil price tumbled with Brent losing as much as 6% and U.S. crude sliding nearly 5% in early trading on Monday. If oil continues its slide for long, it could again be a matter of concern for the emerging markets, as it will yet again lead to a decline in the commodities on which these markets depend for growth.

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ISHARS-MSCI PER (EPU): ETF Research Reports
 
ISHARS-BRAZIL (EWZ): ETF Research Reports
 
ISHRS-MSCI TURK (TUR): ETF Research Reports
 
MKT-VEC RUS SC (RSXJ): ETF Research Reports
 
GLBL-X/F COL 20 (GXG): ETF Research Reports
 
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