While everyone has been focusing on U.S. stocks and President Donald Trump’s ability to make America great again, something has been quietly happening across the globe: Emerging markets have gotten hot once again.
In fact, in 2017, markets in developing areas of the world have done much, much better than the U.S.
Emerging markets — as represented by the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) — are up by roughly 13% so far in 2017, taking in more than $675 million in new fund flows, according to FactSet. That’s a performance EEM has been unable to replicate in years. And it’s in sharp contrast to the roughly 5% gain in the S&P 500 so far this year.
If you’re not already allocated to EMs, that’s OK. Analysts are predicting that emerging markets can keep shining for the rest of the year and beyond. The vast bulk of the catalysts that are expected to drive the developing world — large populations and growing middle classes — are still intact. Recent boosts to commodity prices and local currencies have also helped push EM stocks higher.
EMs are once again the place to be. With that in mind, here are three emerging markets ETFs that should outpace the U.S. over the next year, and likely longer.
Emerging Markets ETFs to Buy: WisdomTree India Earnings Fund (EPI)
EPI Expense Ratio: 0.84%, or $84 annually for every $10,000 invested
India might finally be living up to its much-hyped potential. After years of struggling under bureaucratic red tape and corruption, India is crushing its emerging markets rivals with a vengeance.
All of which is due to the election of Prime Minister Narendra Modi back in 2014.
Modi has pushed heavily for curbing corruption and India’s inefficiencies, as well as boosting infrastructure spending, job growth and numerous other pro-economic policies. And guess what? He’s actually doing it. Indian stocks have been surging while many of their emerging markets rival shave suffered. This has benefited investors in the WisdomTree India Earnings Fund (NYSEARCA:EPI).
EPI boasts more than $1.5 billion in assets under management, making this the largest ETF targeting the nation’s stocks. That’s for good reason. Sticking to WisdomTree’s smart-beta focus, EPI weights its holdings based on profits, which helps kicks out firms that consistently fail to produce.
What you get is the “best of the best” when it comes to Indian stocks, including top holdings such as ICICI Bank Ltd (ADR) (NYSE:IBN) and tech leader Infosys Ltd (ADR) (NASDAQ:INFY). You also get outstanding outperformance — in EPI’s case, that’s 11.5% average annual returns over the past three years.
Emerging Markets ETFs to Buy: iShares MSCI Chile Capped ETF (ECH)
ECH Expense Ratio: 0.64%
One of the biggest stories behind emerging market success in past years was the steady rise in commodity prices. Gains in copper, iron ore, oil and other commodities have transformed the prospects of many nations. After the recession, however, commodity prices dipped, and many of these nations were put on hold.
Now, they’re ready to run again.
Chile is one of the largest producers of copper and other sought-after minerals, and the country has heated up once more as one of Latin America’s best sources of upside potential. Chilean stocks have surged — up more than 20% year-to-date — amid rising economic growth and infrastructure plans.
The continued demand for raw materials should benefit the iShares MSCI Chile Capped ETF (NYSEARCA:ECH), which holds 31 different stocks, including materials names such as potassium nitrate producer Sociedad Quimica y Minera De Chile (ADR) (NYSE:SQM) and pulp and paper company Empresas CMPC SA. However, ECH also holds large stakes in financial and consumer firms, which are benefiting from rising middle-class incomes derived from growing commodity wealth.
Chile isn’t a big name in emerging markets, but it should be, and the ECH could be one of the biggest sleeper picks out there.
Emerging Markets ETFs to Buy: iShares Emerging Markets Dividend ETF (DVYE)
DVYE Expense Ratio: 0.49%
Investors who worry that EM stocks are entirely too risky, take a page out of the smart-beta book and look for funds that cut down on volatility.
Specifically, look for funds that seek out dividends as a measure of quality. Dividends can help turn back the tide of capital losses, and importantly, dividends are typically a sign of some amount of financial stability.
The broader iShares Emerging Markets Dividend ETF (NYSEARCA:DVYE) holds 100 emerging-market stocks that pay out dividends. While yield is a focus, like its sister fund — the iShares Select Dividend ETF (NYSEARCA:DVY) — it’s not the only factor. DVYE hunts down stocks with high-quality dividends supported by real earnings and cash flows.
In other words, this ETF avoids fly-by-night firms and instead invests in the most dependable stocks in the developing world, including Chilean financial Itau Corpbanca and Chinese real estate play Guangzhou R&F Properties.
DVYE yields a fat 5%, which has really smoothed out some rough times since its inception in 2012. In the end, this fund is a great way to bet on emerging markets while maintaining some margin of safety.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.