What To Do With Emerging Markets ETFs

Following several years of struggles, emerging markets exchange traded funds are doing little to foster confidence among investors through the first two months of 2016. For example, the Vanguard FTSE Emerging Markets ETF VWO and the iShares MSCI Emerging Markets ETF EEM, the two largest emerging markets ETFs, are each down six percent year-to-date.

Soon after the widely followed MSCI Emerging Markets Index began swooning in earnest five years ago, investors have continually heard that developing world equities are inexpensive relative to their developed market counterparts.

While that is true, compelling valuations have not been enough to bolster emerging markets stocks, nor have those discounts been enough to prevent advisors and investors from departing emerging markets ETFs.

So developing economy equities stocks and ETFs, such as EEM and VWO, have the look of value plays, but after stomaching a multi-year bear market in these names, investors are left wondering what the best course of action is right now.

“Generally speaking, it is not a good idea to dump an asset class when times are tough. But it might be helpful to dig into what’s been happening over the past few years, to get a better understanding of the complicated dynamics that drive the performance of emerging-markets funds,” said Morningstar in a recent note. 

The worst-performing emerging markets have been commodities exporters, as Morningstar notes. Falling commodities prices compound equity market troubles for the likes of Brazil, Russia and South Africa by weakening currencies and leading to external debt vulnerabilities.

“The price declines in emerging-markets funds may suggest that valuations are growing more attractive. Unfortunately, much of the declines were a result of negative currency translation effects,” adds Morningstar.

Brazil and Malaysia have been plagued with corruption issues while slumping emerging markets technology stocks have been drains on South Korea and Taiwan, among others.

The iShares MSCI Emerging Markets Minimum Volatility ETF EEMV is one option for investors looking to remain in the game while waiting for emerging markets equities to bounce back. EEMV is not perfect, but it has been noticeably less bad than EEM and VWO. Year-to-date, EEMV is down just 3.3 percent. 

As a low volatility ETF, EEMV avoids the most volatile emerging markets, meaning the ETF has only token exposure to Brazilian stocks and no weight to Russia.