As Emerging Asia Wilts, PIE Gets Sliced

The abridged version of the emerging markets ETF story in 2013 goes a something like this: The largest emerging markets, such as the BRIC quartet, have been laggards all year. However, Southeast Asian markets such as Indonesia, the Philippines and Thailand provided not only protection from the emerging markets storm, but profits as well.

At least that was the case for much of the first quarter, but that trade has evaporated as well, punishing one ETF that had risen to acclaim on the back of rallying Southeast Asian equities. That ETF is the PowerShares DWA Emerging Markets Technical Leaders Portfolio PIE. On Tuesday, PIE is off 2.4 percent on volume that reached more than triple the daily average before noon in New York.

The fund is now off 5.1 percent in the past week, a stunning reversal of fortune for an ETF that spent much of the early part of 2013 easily outpacing larger rivals such as the Vanguard FTSE Emerging Markets ETF VWO and the iShares MSCI Emerging Markets Index Fund EEM.

To be clear, PIE has been on the receiving end of ample praise, warranted it should be noted, in this space. Today's look at the ETF does not amount to vilification, but rather just being fair. PIE worked for a while. Hey, the ETF is still up 18.7 percent in the past year compared to just 7.4 percent for EEM. PIE can work again, it just is not working right now.

Establishing way that is the case is not difficult. The same markets that boosted PIE are now pressuring the ETF in significant fashion. Again, this is an easy scenario to explain. ETFs such as EEM and VWO lagged earlier this year because of their substantial weights to the largest developing markets such as BRIC and South Korea.

PIE skirted that mess with significant weights to the performance leaders of the developing such as Indonesia, Thailand, the Philippines and Turkey. Those four markets now comprise nearly 47 percent of PIE's weight, according to PowerShares data.

In a more sanguine environment, one where Turkey is not being rocked by anti-government protests, and the currencies of Indonesia, the Philippines and Thailand are not trading at one-year (or worse) lows against the U.S. dollar, that country lineup would work. Investors know this because they have already seen it work with PIE.

The unfortunate reality is that PIE's biggest country weights have, to steal a baseball analogy, gone from looking like the 1927 New York Yankees to looking a lot like the 1962 New York Mets. From May 22 through June 3, investors pulled $1.6 billion from Southeast Asia's formerly high-flying markets.

The largest country-specific ETFs tracking Indonesia, the Philippines and Thailand are all sporting one month-losses ranging from 14.5 percent to over 16 percent. The iShares MSCI Turkey Investable Market Index Fund TUR is down nearly 20 percent.

Investors that were astute enough to warm to PIE over EEM and VWO may find some comfort in knowing that Dorsey Wright Emerging Markets Technical Leaders Index, the ETF's underlying index, has a legacy of outperforming the MSCI Emerging Markets Index and the MSCI Emerging Markets Growth Index.

That also means those same investors are probably wondering if PIE will rise again. It will, but better pricing awaits the patient investor.

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