Asian and emerging-market stocks have had a tough year, with many individual countries and sectors experiencing double-digit declines. Former emerging-market powerhouses such as Brazil, Russia, India and China have seen their economies decline, taking commodities with them, and even developed European markets have failed to keep pace with the breakneck speed of U.S. stocks in 2013.
However, there still are several international ETFs on my radar that have picked up momentum from their June lows and appear to be poised for additional upside. These diamonds in the rough might be an excellent value opportunity for investors looking to diversify their portfolio outside of the U.S. market.
Click to Enlarge The first country that has experienced a sharp recovery rally in the past six weeks is the iShares MSCI Mexico Capped ETF (EWW).
This ETF currently has $2.4 billion in 49 stocks that trade in Mexico. The top three sectors are consumer staples, telecommunications and materials, which collectively make up 61% of the fund’s assets.
Since the June low, EWW has rallied more than 17% and is poised to break out above its 200-day moving average. A follow-through surge above this key long-term trendline would be a significant technical indicator of further upside. From a fundamental standpoint, Mexico is continuing to implement new social and economic reform measures that should spur investor demand in this growing nation.
It should be noted that EWW will be a more volatile position because of its concentrated focus on a single country as well as outsized positions in several large-cap stocks. However, it does have the advantage of exposure to more defensive sectors and stocks that might not be present in a more diversified fund, such as the SPDR S&P Emerging Latin America ETF (GML).
EWW charges 0.5% annually, or $50 of every $10,000 invested.
Click to Enlarge Another international opportunity that has flown largely under the radar this year is the Guggenheim China Small Cap ETF (HAO).
This fund is comprised of 251 small-cap stocks centered in China and Hong Kong with $184 million in total assets.
For inclusion in the ETF, Guggenheim defines small-capitalization companies as those with a maximum $1.5 billion market capitalization. The top three sectors include industrials, financials and consumer discretionary stocks, which together make up 49% of the ETFs underlying portfolio.
While the more broadly held and large-company-focused iShares China Large-Cap ETF (FXI) has fallen precipitously this year, HAO has regained its long-term trendline.
Small-cap stocks are an excellent way to get exposure to growing segments of the economy that are often overlooked because of their relative obscurity. Many people believe the next phase of China’s growth will be stimulated by local consumers instead of foreign exports, which is what these small-cap stocks are uniquely positioned to reach.
In addition, with HAO, you avoid many of the mega-cap China stocks that are dominated by state-run enterprises.
HAO charges 0.75% annually.
Both of these ETFs offer unique advantages over their peers with excellent capital appreciation potential. However, it goes without saying that with the domestic market stretched to new highs, any hiccup in the U.S. could quickly spread overseas.
That is why it is important to implement a portfolio protection strategy on new positions at these levels. That way you have defined your risk in the event that international stocks retest their 2013 lows.
David Fabian is Managing Partner and Chief Operations Officer of Fabian Capital Management. Learn More: Why I love ETFs, And You Should Too