For a variety of reasons, emerging markets stocks and the corresponding exchange traded funds (ETFs) are being punished this year. The widely followed MSCI Emerging Markets Index is lower by nearly 7% year-to-date and some funds tracking developing economies are sporting significantly worse 2018 losses.
Market-specific political volatility, the stronger U.S. dollar and escalating trade tensions between the U.S. and China are among the factors hampering emerging-markets assets this year, but there is a growing chorus of investors willing to bet emerging markets bounce back.
“EM equities do face increased tail risks such as tightening financial conditions and ripples from U.S.-China trade tensions,” said BlackRock in a recent note. “Yet we believe current valuations and strong earnings growth offer investors ample compensation for these risks.”
Here are a variety of emerging-markets ETFs for investors of varying risk tolerance levels to consider as potential rebound candidates over the near-term.
Emerging-Markets ETFs: iShares Edge MSCI Min Vol Emerging Markets ETF (EEMV)
Expense Ratio: 0.25% per year, or $25 on a $10,000 investment.
The iShares Edge MSCI Min Vol Emerging Markets ETF (BATS:EEMV) is an ideal emerging-markets ETF for risk-averse investors. EEMV, which is nearly seven years old, “seeks to track the investment results of an index composed of emerging market equities that, in the aggregate, have lower volatility characteristics relative to the broader emerging equity markets,” according to iShares.
One of the rubs with low-volatility strategies, EEMV included, is that these products are not designed to capture all of a bull market’s upside. On the other hand, low-volatility funds typically perform less poorly than traditional funds when the underlying market slides. EEMV is living up to that billing this year, with a year-to-date loss of 3.5%. That is not good, but it is less bad than the MSCI Emerging Markets Index.
EEMV offers exposure to more than 15 countries and over 300 stocks, but this emerging-markets fund is underweight Latin American economies relative to the MSCI benchmark and features no exposure to Russian stocks.
Emerging-Markets ETFs: ALPS Emerging Sector Dividend Dogs ETF (EDOG)
Expense Ratio: 0.6%
With value stocks showing some signs of life, the ALPS Emerging Sector Dividend Dogs ETF (NYSEARCA:SDOG) could be an emerging-markets ETF to consider. It is just over one month old, but over that month, EDOG is up nearly 2.8%, offering more than double the returns of the MSCI Emerging Markets Index during that time frame.
EDOG equally weights its individual holdings and sector exposures. At the geographic level, the fund caps each country at five stocks. This emerging-markets ETF holds just 50 stocks, giving it a less broad lineup than other such funds, but EDOG has its advantages.
Notably, none of EDOG’s country allocations exceed weights of 10.55%, meaning country risk is limited to some extent here relative to cap-weighted funds. Second, EDOG’s 30-day SEC yield of 3.8% beats out that of the MSCI Emerging Markets Index.
Emerging-Markets ETFs: WisdomTree India Earnings Fund (EPI)
Expense Ratio: 0.84%
Emerging-markets investors who want to get tactical at the country level have dozens of ETFs to consider. One country that is looking fairly sturdy in the near-term is India, Asia’s third-largest economy. India’s benchmark Sensex Index recently hit an all-time high and the WisdomTree India Earnings Fund (NYSEARCA:EPI) is up an impressive 6.6% over the past month.
EPI holds around 300 stocks — a large roster among single-country funds and one that is impressive in size when considering that EPI’s constituents must be profitable to be included in the fund.
“Consumption is the key driver of India’s economy. This is typically seen in developed economies that have surpassed the initial growth phase of investments and are now mostly consumption societies,” said WisdomTree.
Emerging-Markets ETFs: VanEck Vectors Emerging Markets High Yield Bond ETF (HYEM)
Expense Ratio: 0.4%
For aggressive fixed-income investors, the VanEck Vectors Emerging Markets High Yield Bond ETF (NYSEARCA:HYEM) is an idea to consider. Patience, however, may be required. While the largest domestic junk bond ETFs are modestly up year-to-date, HYEM is lower by 6.8%. On the other hand, HYEM could be offering value in the high-yield space.
“Emerging markets growth still provides a favorable backdrop both outright and relative to developed markets, although the repercussions of a trade war may pose a threat to this dynamic,” according to VanEck. “Leverage ratios and interest coverage among emerging markets high yield issuers have improved steadily since mid-2016, as they have for U.S. high yield borrowers. But investors are being compensated with approximately 30% more yield spread above Treasuries per unit of leverage for emerging markets high yield bonds versus U.S. ones.”
HYEM allocates just 1.9% of its weight to CCC-rated debt, a comparatively low number relative to domestic junk bonds. Of course, there are risks associated with junk bonds, domestic or emerging markets, but HYEM compensates for that risk with a 30-day SEC yield of 6.8 %. HYEM’s effective duration is 3.65 years.
Emerging-Markets ETFs: iShares MSCI Saudi Arabia ETF (KSA)
Expense Ratio: 0.74%
Up about 17% year-to-date, the iShares MSCI Saudi Arabia ETF (NYSEARCA:KSA) is one of 2018’s best-performing single-country emerging-markets ETFs. KSA soared earlier this year in anticipation of Saudi Arabia gaining the coveted emerging markets classification, something index provider MSCI made official in August.
“Investor interest in Saudi Arabia may be at an all-time high following MSCI’s Emerging Market Index inclusion announcement and ahead of the upcoming Saudi Aramco IPO and Vision 2030 reform agenda,” according to BlackRock.
While the MSCI promotion has been priced into Saudi stocks and KSA, there are other catalysts to consider. The kingdom’s economy contracted last year, but is expected to post GDP growth of 1.9% this year and 3.1% in 2019. Public and private consumption is also expected to jump over the next year, an important factor for this still largely oil-dependent economy.
Emerging-Markets ETFs: Xtrackers MSCI Emerging Markets Hedged Equity ETF (DBEM)
Expense Ratio: 0.65%
Dollar strength is often highlighted as a culprit behind weakness in emerging-markets assets, and this year is no different. That scenario opens the door for ETFs such as the Xtrackers MSCI Emerging Markets Hedged Equity ETF (NYSEARCA:DBEM) to strut their stuff.
DBEM is doing just that. No, its 3% year-to-date loss is nothing to brag about, but that is significantly less bad than the performance for the unhedged MSCI Emerging Markets Index. That less bad performance reminds investors that currency risk is real with international investments and needs to be acknowledged, particularly when the dollar is strong.
DBEM’s country and sector exposures are comparable to the MSCI Emerging Markets Index. Should rising Treasury yields continue lifting the dollar, emerging-markets currencies would likely languish, meaning DBEM could remain firm relative to unhedged rivals.
Emerging-Markets ETFs: NuShares ESG Emerging Markets Equity ETF (NUEM)
Expense Ratio: 0.45%
The NuShares ESG Emerging Markets Equity ETF (BATS:NUEM) is just 14 months old, making it one of the newer funds on this list, but there are good reasons to consider adding an environmental, social and governance (ESG) tilt to emerging markets investments.
NUEM’s underlying index “uses a rules-based methodology to arrive at a diversified portfolio of equity securities issued by companies located in countries with emerging markets that adhere to predetermined ESG, controversial business involvement and low-carbon screen criteria,” according to Nuveen.
Over the past year, NUEM is beating the MSCI Emerging Markets Index, which is not surprising. Scores of academic research and historical data points suggest ESG investing works with emerging-markets stocks over long holding periods.
The Nushares fund allocates over 56% of its combined weight to China, South Korea and Taiwan, also the top three geographic weights in the MSCI Emerging Markets Index.
As of this writing, Todd Shriber does not own any of the aforementioned securities.