Emerging-Market ETFs Take Off

by Jim Woods | January 30, 2012 6:15 am

If you had money in emerging-market stocks last year, you’re probably still trying to recover from a European debt-induced hangover.

In 2011, stocks in the bellwether iShares MSCI Emerging Markets Index (NYSE:EEM[1]) fund suffered an 18% smackdown. Most of that decline took place in the second half of the year, and not coincidentally, that’s right when fear of a potential meltdown in the eurozone really kicked up.

In 2012, fears over a Europe-induced economic calamity haven’t led to the kind of beating stocks took last year. And even though global growth forecasts from organizations such as the International Monetary Fund and the World Bank aren’t exactly robust, investors don’t seem to be paying much attention. In fact, we’ve seen a happy reversal in emerging markets, with many country-specific emerging-market exchange-traded funds (ETFs) surging by double digits so far this year.

The aforementioned iShares MSCI Emerging Markets Index has seen a year-to-date surge of 11.45% through Jan. 26. That kind of performance is indeed stellar, and it shows the extent of the flow of investor capital into emerging markets. Now if we dig deeper into specific emerging markets, we see a bevy of big gainers that easily outpace any of the major domestic markets.

For example, the iShares Taiwan Index (NYSE:EWT[2]) is up 8.28% year to date, while the iShares South Africa Index (NYSE:EZA[3]) has climbed 8.36%. The iShares South Korea Index (NYSE:EWY[4]) is up 10.68% year to date. Last year, the two largest emerging-market economies, China and Brazil, saw their representative ETFs struggle mightily. In 2012, however, it’s been a far different tale.

The iShares FTSE/Xinhua China 25 Index Fund (NYSE:FXI[5]) has seen an impressive 12.73% run year to date, and even more impressive is the surge in the iShares MSCI Brazil Index (NYSE:EWZ[6]), which is up 15.63% this year. Perhaps the biggest turnaround story so far, though, is India. That country’s equity market took a dive in 2011, with the WisdomTree India Earnings (NYSE:EPI[7]) fund sinking some 38%. This year the fund has vaulted an incredible 23.59%. That’s a serious turnaround in just under four trading weeks, and such a jump illustrates the thirst investors still have for the big returns offered by emerging-market equities.

The question now is, will the wild ride upward in emerging markets continue?

Conventional market wisdom tells us the answer is no because sectors such as China, Brazil and India can’t keep up this kind of pace. And while the conventional wisdom here is likely true, that doesn’t mean it’s too late to get in on the gains. With the Federal Reserve vowing to keep the easy-money spigot open for the next three years and with fears over Europe largely on the back burner, at least for now, emerging-market investors will likely continue to dive into these waters — and that means we could be in for a big splash in the sector.

ticker name YTD GAIN
EWT iShares MSCI Taiwan Index 8.28%
EZA iShares MSCI South Africa Index 8.36%
EWY iShares MSCI South Korea Index 10.68%
EEM iShares MSCI Emerging Mkts Index 11.45%
FXI iShares FTSE/Xinhua China 25 Index Fund 12.73%
RSX Market Vectors Russia ETF 13.62%
EWZ iShares MSCI Brazil Index 15.63%
EPI WisdomTree India Earnings 23.59%
Data as of 1/26/12

At the time of publication, Jim Woods held no positions in any of the stocks mentioned here.

Endnotes:
  1. EEM: http://studio-5.financialcontent.com/investplace/quote?Symbol=EEM
  2. EWT: http://studio-5.financialcontent.com/investplace/quote?Symbol=EWT
  3. EZA: http://studio-5.financialcontent.com/investplace/quote?Symbol=EZA
  4. EWY: http://studio-5.financialcontent.com/investplace/quote?Symbol=EWY
  5. FXI: http://studio-5.financialcontent.com/investplace/quote?Symbol=FXI
  6. EWZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=EWZ
  7. EPI: http://studio-5.financialcontent.com/investplace/quote?Symbol=EPI

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