The combination of new coronavirus headlines and heavy allocations to China (the virus originated there) in many emerging markets exchange-traded funds is, not surprisingly, weighing on those assets. But the losses aren’t as bad as one might expect.
The widely followed MSCI Emerging Markets Index, in which China commands a weight of 33%, is lower by 3.2% over the past month. That’s actually slightly worse than the 2.9% shed by the MSCI China Index over the same period.
Those aren’t good performances by any stretch, but with the “Wuhan virus” making headlines on a daily basis, it would have been reasonable to expect harsher repudiation of emerging markets assets. With global central banks continuing to inject liquidity into monetary systems and valuations looking attractive, some investors may want to consider emerging markets ETFs today.
“It is also worth highlighting that this wave of liquidity is occurring at a time when emerging market stocks remain reasonably priced,” BlackRock’s Russ Koesterich wrote in a recent note. “The MSCI Emerging Market Index is trading at about a 26% discount to developed markets, roughly in-line with the post-crisis average.”
For the adventurous, here are some emerging markets ETFs to evaluate over the near term. These five funds have the potential for big long-term upside.
Global X MSCI China Consumer Discretionary ETF (CHIQ)
Expense ratio: 0.65% per year, or $65 on a $10,000 investment.
It’s easy to look at the Global X MSCI China Consumer Discretionary ETF (NYSEARCA:CHIQ), note this the fund is lower by almost 6% since the first coronavirus case emerged, and subsequently dismiss it as a credible play as long as the virus situation isn’t resolved.
After all, CHIQ serves up significant allocations to stocks such as Alibaba (NYSE:BABA), JD.com (NASDAQ:JD) and Trip.com (NASDAQ:TCOM). The virus has pinched each of those names. However, there’s more to the story, particularly for patient investors.
“We think the main long-term beneficiaries of the coronavirus outbreak are Chinese Internet companies with online products and services that are not yet well penetrated, as they could see an increase in users,” Morningstar’s Chelsey Tam wrote. “This includes companies offering online education, fresh food delivery, and office tools, which are likely to see faster adoption rates.”
Plus, CHIQ jumped almost 4% last week, potentially a sign it’s ready to put virus fears to bed.
VanEck Vectors Emerging Markets High Yield Bond ETF (HYEM)
Expense ratio: 0.40%
Bonds have been a good refuge for investors looking to skirt coronavirus-impacted assets. And that sentiment isn’t confined to boring U.S. Treasury bonds. The VanEck Vectors Emerging Markets High Yield Bond ETF (NYSEARCA:HYEM) has been steady over the past month despite a 12% weight to Chinese junk debt.
Yes, there’s risk with junk bonds. And yes, many believe combining emerging markets and high-yield debt amplifies those risks. But HYEM offers a 30-day U.S. Securities and Exchange Commission yield of 5.3% to compensate for those risks. Plus, this emerging markets ETF’s risk profile may not be as severe as it appears on the surface.
“Interest coverage ratios among emerging markets high yield issuers were nearly 20% higher than U.S. counterparts, while net leverage was 20% lower, and the 2019 default rate among emerging markets high yield issuers was lower than the U.S. high yield default rate,” VanEck’s Fran Rodilosso wrote in a recent note.
With an effective duration of 3.4 years, HYEM also allocates 19% of its combined weight to Brazilian and Turkish bonds.
iShares ESG MSCI EM Leaders ETF (LDEM)
Expense ratio: 0.16%
Environmental, social and governance (ESG) investing is gaining momentum. And investors that actively follow ETFs will hear more about this evolution as time goes by. That includes the introduction of more funds embracing ESG principles, including the iShares ESG MSCI EM Leaders ETF (NASDAQ:LDEM). This is truly a new fund, debuting just on Feb. 5.
Obviously, LDEM has a short track record, but thanks to the backing of a Finnish pension company, LDEM has almost $648 million in assets under management. Home to 406 stocks, LDEM follows the MSCI EM Extended ESG Leaders 5% Issuer Capped Net Index.
Companies must have an ESG score of at least “BB” from MSCI. Plus, the benchmark excludes alcohol, tobacco and gambling companies as well as nuclear power producers and civilian firearms makers.
Freedom 100 Emerging Markets ETF (FRDM)
Expense ratio: 0.49%
Most ESG funds, emerging markets ETFs and otherwise, use a methodology similar to the aforementioned LDEM, which is to exclude certain “sin” stocks and environmental polluters. The Freedom 100 Emerging Markets ETF (BATS:FRDM), takes a different, potentially more rewarding approach.
The Life + Liberty Freedom 100 Emerging Markets Index, FRDM’s underlying index, emphasizes human and economic freedom. Those are traits often taken for granted when investing in domestic assets, but they are important considerations in developing economies. China, Brazil and Russia — usually represented in traditional emerging markets benchmarks — are not represented in the fund’s holdings.
Another important ingredient in FRDM’s recipe is its limitations on holding state-owned enterprises. These are companies that the government controls, and they often offer sub-par returns. Over the long term, FRDM could prove to be a winner in its category because what it filters out can prove more impactful from a macroeconomic perspective than the industry exclusions made by rival funds.
WisdomTree Emerging Markets High Dividend Fund (DEM)
Expense ratio: 0.63%
Standard emerging markets ETFs usually carry higher dividend yields than equivalent U.S.-focused products. And with the MSCI Emerging Markets Index yielding 2.9%, developing economies represent a decent income proposition. The WisdomTree Emerging Markets High Dividend Fund (NYSEARCA:DEM) kicks things up a couple of notches with a yield of 5.1%.
DEM follows the WisdomTree Emerging Markets High Dividend Index. While companies in that benchmark are ranked by yield, they are weighted by dividends paid, an important difference. DEM can help investors avoid companies that may be strained by their dividend obligations.
Taiwan, China and Russia combine for almost two-thirds of DEM’s geographic weight. That gives the WisdomTree product a value feel because Russian stocks are relatively inexpensive, and it does make DEM something of an indirect bet on oil prices.
Todd Shriber owns shares of DEM. He has been an InvestorPlace contributor since 2014.