At the end of 2018, InvestorPlace readers chose the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) to be the best ETF in 2019. So far, the EEM ETF has trailed behind several of the top contenders and currently sits at the No. 7 spot with a 9% increase year-to-date.
Although it has a long way to climb before it can dethrone the current leader — the Pacer Benchmark Data & Infrastructure Real Estate ETF (NYSEARCA:SRVR), which is up more than 30% YTD — EEM is still worth a deeper look from a longer-term perspective regardless of whether it comes out on top at the end of 2019.
Can the EEM ETF Rise to the Top?
As an exchange-traded fund composed of stocks in emerging markets and largely based in China, the short-term investment thesis behind EEM relies heavily on an easing of trade relations between the U.S. and China. So far, this hasn’t happened, with trade negotiations between the two nations constantly ping-ponging from seemingly positive to negative throughout the first half of 2019.
With primary holdings like Alibaba (NYSE:BABA) and Tencent Holdings (OTCMKTS:TCEHY), which are partially tied to tariff concerns and the general slowing of the Chinese economy, it’s no wonder the emerging markets fund has failed to rise above most of the other names fighting for the best ETF title this year. Consider that 29% of the ETF’s portfolio is comprised of Chinese stocks, with the remaining big-time allocations based in South Korea (12%), Taiwan (11.7%) and India (9.4%).
Clearly, EEM will never be fully immune to anything trade-war related. But that’s also a part of its initial appeal, and likely the core reason our readers picked it to win in 2019.
Assuming optimism about the future of the U.S.-China relationship improves, many Chinese stocks should recover from the drubbing experienced at the end of 2018. And trade-war boost or not, it’s not necessarily all doom and gloom for EEM. Some Chinese stocks have already recovered, despite tariff concerns.
Bottom Line on EEM
Although the EEM ETF has made significant improvements from the two major dips set in October and December 2018, it still remains in the red when you look at it over a one-year span. And the longer trade war tensions loom, and the slimmer the possibility for a resolution becomes, the less chance EEM has for the predicted comeback in 2019.
With the G-20 summit this week, investors should expect more clarity on the political landscape, which in turn could affect EEM’s holdings even further, either for better or worse.
Basically, the bullish case for EEM still exists, but its potential might not be fully realized this year, unless current market conditions improve. If that happens, Chinese stocks get a boost and it could make a Hail Mary pass at the close of 2019.
It’s not impossible, but it’s too hard to say at this point whether it can still become one of the best ETFs of 2019.
Robert Waldo is an an Assistant Editor for InvestorPlace. As of this writing, he did not hold a position in any of the aforementioned securities.