Editor’s note: This article is part of InvestorPlace.com’s Best ETFs for 2019 contest. Jim Woods’ pick for the contest is the iShares Core MSCI Emerging Markets ETF (NYSEARCA:IEMG).
Where do you find long-term (i.e. over the next year) opportunities in a market where everything seems to be going south? One place to look is sectors that have really been hit hard over the past year. One such market segment that I think is setting itself up for a nice rebound in 2019 is emerging markets.
Over the past 12 months, the iShares Core MSCI Emerging Markets ETF (NYSEARCA:IEMG), my preferred ETF for exposure to the emerging markets, is down over 16%. The chart below shows emerging markets’ struggles compared to the relatively modest struggle in broad-based domestic equities such as those in the S&P 500.
Yet if we broaden our perspective to a three-year period, we discover that stocks in the segment actually are up over 18%.
So, what brought emerging markets down in 2018? Well, let’s start with the toxic cocktail of the trade war between the United States and China. This unnecessary and destructive battle serves the masters of nationalism, not the freedom of individuals, but I digress.
Then we have slowing growth in China, as evidenced by the latest figures showing retail sales and industrial production continue to weaken. Then we have the stronger U.S. dollar, and up until October, a generally bullish U.S. equity market that caused capital to flow out of emerging markets and into the relative safety of stocks here at home.
In 2019, however, I suspect the tables are ready to turn, and for several good reasons.
According to research published in July from Richard Turnill, global chief investment strategist at BlackRock, “This year’s weakness in EM equities has opened up a disconnect between prices and fundamentals. EM equities have recovered somewhat in recent weeks [July 18], yet are still down almost 15% from January peaks.” As we know, that decline only got worse post July.
Turnill goes on to write, “This has left valuations at 11.3 times forward earnings, a shade below their five-year average … Yet forward earnings-per-share (EPS) growth estimates of 13.4% are running well ahead of the average over the same period. EM EPS growth forecasts for both this year and 2019 have been revised up since the start of the 2018, implying the outlook for EM stocks may be brighter than current valuations suggest.”
And there you have it, strong anticipated growth in earnings per share over the next year, along with what has now become a very attractive price-to-earnings ratio of 12.1 according to the latest figures from iShares, make IEMG a very attractive play here for investors with a 12-month time horizon.
As for the particulars of this fund, IEMG seeks to track the investment results of an index composed of large-, mid- and small-capitalization emerging-markets equities. So, you get a cross section of the emerging market space. The fund has some 1,847 holdings spread throughout 12 regions. The largest exposure is to emerging markets in China (28.7%), South Korea (14.3%) and Taiwan (12.2%).
Top holdings in the fund include some high-profile tech names like Tencent Holdings (OTCMKTS:TCEHY), Alibaba (NYSE:BABA), Taiwan Semiconductor (NYSE:TSM) and Samsung. The fund also is very cost efficient, with an expense ratio of just 0.14%, and a 30-day SEC yield of 2.4%.
If you want to beat the market in 2019, I recommend taking a trip to emerging markets.
At the time of this writing, Jim Woods held no positions in any of the securities mentioned. He is the editor of Successful Investing, Intelligence Report, and Weekly ETF Report, as well as several books on investing.