If 2016 ended today, it might well go down as the year of the emerging markets renaissance. After several years of lagging developed markets, developing world equities are getting their groove back and doing so in significant fashion.
Just look at the widely followed MSCI Emerging Markets Index, to which $1.5 trillion in global assets are benchmarked. That index is up 17.7% year-to-date, or more than double the 8.3% returned by the S&P 500. Cementing the notion that this is the year of the emerging markets comeback is this data point: Of this year’s best exchange-traded funds, specific to single-country funds, nine of the top 10 non-leveraged country ETFs are emerging-markets funds.
The iShares MSCI New Zealand Capped ETF (NYSEARCA:ENZL) is the lone developed market fund among that set of ETFs. Some of these offerings have delivered whopping gains and we’re not even eight full months into year, prompting some investors to wonder if the good times can continue.
Here, we’ll examine five of 2016’s best non-leveraged single-country ETFs, what has powered these funds higher this year and whether or not it is too late for investors to get involved.
World’s Best ETFs: iShares MSCI All Peru Capped Index Fund (EPU)
Expenses: 0.63% annually, or $63 per $10,000 invested
Year-to-Date Gain: 73%
Peru is not the largest Latin American economy — not even close. It is just a fraction of the size of regional behemoths such as Brazil and Mexico, but a lack of economic heft is not keeping the iShares MSCI All Peru Capped Index Fund (NYSEARCA:EPU) from being one of the best ETFs out there. In fact, the only ETF trading in the U.S. dedicated to Peruvian equities is this year’s best single-country performer, and that includes emerging and developed markets.
In local currency terms, Peru’s S&P Lima General Index — not the index tracked by EPU — is the world’s best-performing equity index this year, with a gain of over 58%. The recent election of market-friendly President Pedro Pablo Kuczynski is cited as a catalyst for some of the strength in Peruvian stocks this year.
The fact that the markets are embracing Kuczynski is certainly helping EPU, but there are other factors at play and it somewhat answers the question about whether EPU can keep soaring. Peru is one of the world’s largest silver producers and a big gold and copper producer as well. With gold and silver soaring, EPU is joining in on the fun, which makes sense as the ETF allocates over 50% of its weight to materials stocks.
Yes, EPU can keep rising, but much of that is dependent on silver prices.
World’s Best ETFs: iShares MSCI Brazil Index (ETF) (EWZ)
YTD Gain: 63.5%
It speaks to the strength of Peruvian stocks that with a 63% gain, iShares MSCI Brazil Index (ETF) (NYSEARCA:EWZ) is relegated to second place on this list. Adjusted for currency terms, Brazil is actually home to the world’s best-performing equity market this year — that after several years of Latin America’s largest economy being a significant drag on broader emerging markets indexes.
Much of EWZ’s best ETFs status this year is the result of President Dilma Rousseff being removed from office and heading toward impeachment proceedings. With EWZ and Brazilian equities, it had gotten to the point that investors were adopting an “anyone but Rousseff” attitude.
However, that puts pressure on Acting President Michel Temer to move Brazil past the corruption issues that plagued prior administrations while shoring up the country’s wobbly finances. That is easier said than done, as evidenced by the recent delay in a key Brazilian budget vote.
“After two years of a deep recession, the economic fundamentals of Brazil are showing signs of bottoming out. Industrial production has started to turn, and so have sentiment indicators, with business confidence indexes leading the way,” according to BlackRock.
EWZ will retain its best ETFs status if Brazil can damp inflation to the point that lowering some of the world’s highest interest rates (over 14%) is possible.
World’s Best ETFs: iShares MSCI South Africa Index (ETF) (EZA)
YTD Gain: 23.9%
A year-to-date gain of 26% indicates the iShares MSCI South Africa Index (ETF) (NYSEARCA:EZA) is one of this year’s best ETFs, and explaining why is not difficult. In fact, EZA’s resurgence is similar to that of the aforementioned EPU.
The difference being that in the case of EZA, the precious metals driving the fund higher are not gold and silver — though South Africa is a big producer of the former. Rather, they are platinum and palladium. South Africa is the world’s largest platinum producer and the second-largest palladium producer behind Russia.
So the simple answer about EZA’s ability to build on its year-to-date gains is yes, this ETF can do just that as long platinum and palladium prices stay strong.
U.S. investors considering EZA should keep an eye on car sales data in the U.S. and China, because palladium is a key component in the production of catalytic converters in cars manufactured in the world’s two largest automotive markets.
World’s Best ETFs: iShares MSCI Thailand Capped ETF (THD)
YTD Gain: 28.3%
The iShares MSCI Thailand Capped ETF (NYSEARCA:THD) is the highest-ranked Asia fund among these ETFs, an impressive feat considering China, a prime destination for Thai exports, has been an emerging markets laggard this year.
THD’s best ETFs status is all the more impressive when considering some issues, though not yet too alarming, surrounding Thai banks. That is an important footnote because THD allocates nearly 27% of its weight to financial services stocks, making that the ETF’s largest sector weight.
“Fitch has kept the rating outlook of most Thai banks at Stable, despite a negative sector outlook. Credit profiles have remained broadly resilient given deteriorating asset quality due to strong capital and reserve buffers. The sector’s stand-alone CET1 capital ratios averaged 14.2 percent in May 2016, up slightly from 14 percent at end-2015, and were well in excess of regulatory requirements (which, including the conservation buffer, is 5.125 percent this year and will rise to 7 percent by 2019). Banks’ loan loss coverage also remained solid — in excess of 100 percent for large listed banks and above 80 percent for smaller lenders — as of first half of 2016,” according to Fitch Ratings.
THD can build on its recent gains as long as the Thai baht remains sturdy, the military junta government running the country remains stable and investors continue displaying a willingness to pay up for Thai stocks, which are more richly valued than the MSCI Emerging Markets Index. However, Thailand trades at a lower multiple than Indonesian and Philippine stocks, two markets Thailand is often measured against.
World’s Best ETFs: Global X MSCI Colombia ETF (GXG)
YTD Gain: 28%
Like its Brazil and Peru counterparts, the Global X MSCI Colombia ETF (NYSEARCA:GXG) is a top-flight emerging-markets fund in 2016 due to rebounding commodities prices and a stronger local currency.
Although it is not a member of the Organization of Petroleum Exporting Countries, Colombia is one of South America’s largest oil producers, meaning the economy there is highly dependent on crude exports.
In other words, the higher oil prices climb, the better things are for Colombian stocks and GXG.
Like Brazil, Colombia is trying to damp inflation and Colombia has the luxury of having far lower interest rates so the central bank there can be hawkish. Indeed, it has been. GXG has become one of this year’s best ETFs in the midst of a streak of 11 consecutive months in which Colombia’s central bank has boosted borrowing costs.
Colombia’s benchmark lending rate is 7.75%, but the concern for GXG’s ability to remain a best ETF is that June inflation figures were Colombia’s highest in 16 years.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.