It Might Finally Be Time For Emerging Markets ETFs

The signs remain somewhat faint, but some market observers believe those signs are mounting in favor of emerging markets resurgence. Plenty of exchange traded funds, including the iShares Core MSCI Emerging Markets ETF IEMG, would like for that thesis to be proven positive.

IEMG, one of the largest and least expensive emerging markets ETFs trading in U.S., is down about 8 percent year-to-date.

What Happened

A strong dollar, a tariff spate turned trade war with China and political volatility in some developing economies are among the factors hindering emerging markets equities and ETFs this year. Those factors and others have chastened investors with data suggesting allocations to emerging markets assets are low by historical standards.

The iShares MSCI Emerging Markets ETF EEM has seen year-to-date withdrawals of $5.04 billion, a total surpassed by just three other ETFs. Single-country funds tracking Brazil and India, among other developing economies, are also bleeding assets this year.

“Country-specific shocks and tightening global financial conditions have pressured EMs with the greatest external vulnerabilities,” said BlackRock in a recent note. “Yet we do not see the EM swoon as a broader threat to global markets.”

Why It's Important

Even the moribund iShares MSCI Turkey ETF TUR, still one of this year's worst-performing emerging markets funds, is showing signs of life with a gain of over 17 percent over the past month. The recent rally in Turkish stocks has been fueled a rebounding lira.

“Currencies have also shown some signs of stabilization, with emergency rate hikes in Turkey stemming a sharp selloff in the lira. We see this as a positive sign for EM assets overall,” according to BlackRock.

Emerging markets still have to combat higher U.S. interest rates as the Federal Reserve could raise rates for a fourth time this year in December and several more times in 2019.

“Higher U.S. interest rates are adding to the EM stress by creating competition for capital and leading investors to reset their return expectations for riskier assets, especially EM assets and equities,” said BlackRock.

What's Next

Country-specific events may be clouding what, broadly speaking, remain solid fundamentals for the emerging markets complex.

“We see this year’s EM selloff more as a series of idiosyncratic accidents masking stronger EM fundamentals rather than a canary in the coalmine for global markets,” said BlackRock.

Problem children such as Argentina and Turkey are small parts of the MSCI Emerging Markets Index and ETFs like EEM and IEMG. South Africa, another troubled developing economy, is just the sixth-largest country exposure in the MSCI Emerging Markets Index.

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