Halfway through 2020, it’s fair to say emerging markets equities and the related exchange traded funds are on pace to disappoint relative to U.S. counterparts. The MSCI Emerging Markets Index is down 11% year-to-date, about double the loss of the S&P 500.
In theory, blaming the emerging markets malaise on China because the country was the initial epicenter of the coronavirus, appears to make sense. However, that argument doesn’t hold water because the MSCI China Index is down just half a percent this year.
So what’s vexing developing economies? Covid-19 isn’t helping. Slumping oil prices are a drag. The strong dollar, which crimps emerging markets currencies and dollar-denominated debt issued by those nations, is a problem, too.
Broadly speaking, investors practically have to hold their noses to get involved with emerging markets ETFs these days. That being said, there are some pockets of opportunity to consider. Here are some of the best emerging markets ETFs:
- EMQQ Emerging Markets Internet & Ecommerce ETF (NYSEARCA:EMQQ)
- iShares MSCI Taiwan ETF (NYSEARCA:EWT)
- KraneShares CSI China Internet ETF (NASDAQ:KWEB)
- Global X MSCI China Communication Services ETF (NYSEARCA:CHIC)
- KraneShares MSCI All China Health Care Index ETF (NYSEARCA:KURE)
- Freedom 100 Emerging Markets ETF (BATS:FRDM)
- Global X MSCI Greece ETF (NYSEARCA:GREK)
EMQQ Emerging Markets Internet & Ecommerce ETF (EMQQ)
Expense ratio: 0.86% per year, or $86 on a $10,000 investment
The EMQQ Emerging Markets Internet & Ecommerce ETF is proof that an e-commerce ETF doesn’t need Amazon (NASDAQ:AMZN) on its roster to deliver for investors. It’s also proof that investors should look at e-commerce through a global lens and not think it’s a strictly American phenomenon.
Alone, EMQQ’s 31% year-to-date return is interesting. It’s more interesting when acknowledging that the fund is crushing traditional, diversified emerging markets ETFs. Oh yeah, check out the performances of many of the ETFs with the largest weights to Amazon. EMQQ is easily topping those funds, too.
Given China’s heft in the ex-U.S. online retail arena, it’d be easy to assume that EMQQ is heavily dependent on Alibaba Group (NYSE:BABA) and JD.com (NASDAQ:JD). Those stocks combine for roughly 13% of the fund’s weight, but Tencent Holdings (OTC:TCEHY) and MercadoLibre (NASDAQ:MELI) are among the other names driving EMQQ’s returns, with MercadoLibre confirming EMQQ isn’t all about China.
iShares MSCI Taiwan ETF (EWT)
Expense ratio: 0.59% per year
Conservative investors looking for some country-specific exposure may want to consider the iShares MSCI Taiwan ETF. Taiwan is usually one of the least volatile developing economies. Down 2.6% year-to-date, EWT is proving, at the very least, it’s a less worse bet than broader emerging markets ideas.
There are some reasons why EWT is a compelling idea even for risk-averse investors. First, the economy there is highly advanced compared to other developing regions. In fact, some market observers don’t even consider it an emerging market. Second, EWT isn’t burden by large weights to bank stocks, commodities producers, or state-owned enterprises (SOEs), as are many single-country ETFs in the EM category.
“Taiwan has managed to show resilience in its financial market, largely attributed to a 20 percent surge in electronic component exports,” reports Taiwan News. “According to JP Morgan’s latest report on the global outlook, the island nation is expected to see a 0.1 percent growth in its GDP this year and a 3.1 percent economic growth rate in 2021.”
On that note, EWT is basically a tech ETF as the fund devotes 56.70% of its weight to that sector.
KraneShares CSI China Internet ETF (KWEB)
Expense ratio: 0.76% per year
As its name implies, the KraneShares CSI China Internet ETF is dedicated to Chinese internet investments, many of which are directly tied to fast-growing themes, such as e-commerce, social media, and streaming entertainment. As is the case with the aforementioned EMQQ, the internet focus is paying big dividends for KWEB investors this year.
Here’s a quick rundown of the assets KWEB is topping in 2020: broader emerging markets ETFs, diversified China funds, the S&P 500, and the largest U.S.-focused internet ETF. The last indicates KWEB doesn’t need Amazon to deliver upside.
Another catalyst to consider is China’s Singles Day, which is Nov. 11, 2020. It’s one of the biggest shopping days of the year in the world’s largest internet market and an event that KWEB is often responsive to. Statistics confirm the long-term opportunity set with KWEB and its components.
“Chinese retail web sales totaled US$1.5 trillion in 2019 (compared to US$601.7 billion in the United States), representing an increase of 16.5% year-over-year,” according to KraneShares.
Global X MSCI China Communication Services ETF (CHIC)
Expense ratio: 0.66% per year
China’s e-commerce and internet markets are full of companies that are the Chinese equivalents of well-known American companies. For example, Alibaba is often called the “Amazon of China.” For investors looking for the Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) of China, the Global X MSCI China Communication Services ETF is one of the best emerging markets ETFs to consider.
CHIC is rebounding off its March lows, but its recovery hasn’t been as intense as those offered by equivalent U.S. communication services ETFs. That could imply CHIC is due to play catch-up, but even if that doesn’t happen over the near-term, there are strong long-term tailwinds for this ETF, including the rise of China’s middle class.
“With greater urbanization and disposable income, China’s rising middle class has become increasingly connected online,” according to Global X. “Internet penetration has reached 55%, rising nearly 20% in a decade, but still has much further room to grow compared to the US, which stands at 87%.”
KraneShares MSCI All China Health Care Index ETF (KURE)
Expense ratio: 0.65% per year
The KraneShares MSCI All China Health Care Index ETF is higher by almost 34% this year, making it one of the best-performing healthcare funds, regardless of point of geographic emphasis. Yes, much of KURE’s 2020 bullishness is tied to investors speculating that because China was the touching off point for Covid-19, that the country would also be a leader in developing therapies or vaccines for the virus.
That can make for a somewhat confining, risky bet, particularly if it’s a U.S. or European company that wins the race to the coronavirus vaccine finish line. Fortunately, it would be inaccurate to view KURE solely as a coronavirus play. After all, China is already the second-largest healthcare market in the world behind the U.S.
“There is still opportunity for considerable growth in China’s healthcare market with per capita health spending at just $398, compared to an average of over $6,500 for the world’s top eight healthcare markets in terms of per capita expenditure,” according to KraneShares.
Freedom 100 Emerging Markets ETF (FRDM)
Expense ratio: 0.49% per year
Many of the funds mentioned here are country-specific plays, but the Freedom 100 Emerging Markets ETF is a refreshing spin on old, broad-based emerging markets funds. What makes FRDM unique and relevant in the future is its freedom-weighted methodology.
Not only does that steer the fund away from countries with poor human rights records, it keeps investors away from significant SOE exposure, which is proven to be a drag on long-term returns in emerging markets equities.
FRDM is heavily allocated to more advanced developing economies, including Taiwan. That can reduce volatility while providing investors with above-average technology exposure relative to traditional emerging markets indexes. With that comes higher quality traits and the potential for out-performance.
Global X MSCI Greece ETF (GREK)
Expense ratio: 0.57% per year
Last year, the Global X MSCI Greece ETF was one of the standouts among best emerging markets ETFs, but in 2020, GREK is being hampered by the coronavirus. That’s not a surprising scenario because the Greek economy is heavily dependent on luring tourists from the U.S. and other parts of Europe.
Prior to the pandemic, the Greek economy was in a fragile though improving state. What’s interesting with GREK is that after years of European stocks lagging their U.S. counterparts, Greece’s status as a member of the Eurozone and European Union (EU) may provide a foundation for the fund to rebound. The European Central Bank (ECB) is doing its part to support the region’s ailing economies with Fed-esque easy monetary policy.
“Greece, however, has more monetary support than the average emerging market,” notes Global X. “In response to widespread liquidity issues across Europe, the European Central Bank (ECB) announced an increase to its quantitative easing (QE) program and activated a powerful €750 bn bond-buying program, called the Pandemic Emergency Purchase Program (PEPP).”
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.