It is not a stretch to say some, probably plenty, of investors are tired of hearing about how poorly emerging markets stocks and exchange traded funds are performing this year.
Those laggard performances are summed up by the Vanguard FTSE Emerging Markets ETF (VWO) and the iShares MSCI Emerging Markets ETF (EEM). VWO and EEM, the two largest emerging markets ETFs, are both down more than 9% this year. The pair have lost more than $9.1 billion in assets combined, making EEM and VWO the second- and third-worst ETF offenders in terms of lost assets.
In terms of performance, plenty of emerging markets ETFs have been much worse than the diversified VWO and EEM. That says it takes a daring investor to get involved with many emerging markets ETFs, even some of the most familiar funds.
Let’s have a look at some ETFs tracking emerging markets that could, excuse the pun, emerge with solid results for patient, risk-tolerant investors.
Emerging Markets ETFs: iShares MSCI Brazil Capped ETF (EWZ)
Expense Ratio: 0.62%, or $62 annually for every $10,000 invested
The stink of corruption, a tumbling currency, dwindling commodities demand and a slowing economy (though still Latin America’s largest) are among the problems plaguing the once highflying iShares MSCI Brazil Index ETF (EWZ).
Well, you’d need to go back several years to find the time when the largest Brazil ETF was a highflier. These days, EWZ is down 34.1% year-to-date, making it one of the most egregious offenders among emerging markets single-country ETFs.
Barring a reversal of mammoth proportions, EWZ is cruising toward its third consecutive annual loss, and its fourth in the past five years. And investors are not waiting around for good tidings to emerge. EWZ is an emerging markets ETF that was once home to more than $5 billion in assets. As of Oct. 14, that number was just $1.9 billion, according to issuer data.
Things have gotten so bad for EWZ that several of its marquee holdings, including Banco Bradesco (BBD), Petrobras (PBR) and Vale (VALE) trade deep into the single digits. In fact, Petrobras and Vale reside below $5, depending on the day.
The play with this emerging markets ETF has some moving parts. Daring investors can hope Brazil returns to economic growth in 2016, or that a change in government becomes imminent. Either catalyst would spark EWZ. The issue is exactly when those catalysts will materialize.
Emerging Markets ETFs: KraneShares CSI China Internet Fund (KWEB)
Expense Ratio: 0.71%
On a year-to-date basis, the KraneShares CSI China Internet Fund (KWEB) is one of the steadier emerging markets ETFs with a loss of just 1.4%, but KWEB’s losses have recently accelerated. The fund is down 16.3% over the past six months.
The good news is a bet on KWEB is not the leap of faith that a similar wager on EWZ, or any number of emerging ETFs, is. Many of KWEB’s recent struggles can be blamed on Alibaba (BABA), which the ETF assigns a weight of 9.1% to, making that stock its second-largest holding. Alibaba has tumbled more than 34% this year, infecting other KWEB holdings such as JD.com (JD) and Vipshop Holdings (VIPS).
While there is no shortage of controversy surrounding Alibaba, the stock is up 5.6% over the past month, and the bull case for Chinese Internet stocks remains intact.
“Online sales of consumer goods accounted for 9.8% of all consumer goods sold in China from January through August this year, a 33% increase year-over-year. We believe the China internet sector represents one of the most attractive segments of the ‘new China’ economy,” said KraneShares in a recent note.
SPDR S&P Emerging Markets Dividend ETF (EDIV)
Expense Ratio: 0.49%
What is surprising about the performance of the SPDR S&P Emerging Markets Dividend ETF (EDIV) is that it is a dedicated dividend fund that significantly lagged its diversified emerging markets rivals, such as EEM and VWO. Historical U.S. market data indicates that dividend stocks often perform less poorly than their non-dividend counterparts during times of market stress.
That has not been the case with SPDR S&P Emerging Markets Dividend ETF, which is down more than 20% this year. South Africa and Brazil combine for one-quarter of EDIV’s geographic weight. We’ve already outlined some of the risks with Brazil and South Africa shares, namely waning commodities demand. Additionally, South Africa’s unemployment rate resides near 20%, one of the worst rates of joblessness in any emerging market.
There is some silver lining with EDIV, including its 26.3% weight to Taiwan. That is EDIV’s largest country allocation, which is important because Taiwan is one of the least volatile emerging markets, as measured by standard deviation, an oft-cited measure of securities’ volatility. Additionally, EDIV has a dividend yield of 4.9%, according to issuer data, so investors will be compensated to some extent for the risk that comes along with this emerging markets ETF.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
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