Guess What? Emerging Markets ETFs Are Cheap!

Investors in emerging markets exchange-traded funds have heard this before. Not long 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.

Year-to-date, the Vanguard Emerging Markets Stock Index Fd VWO and the iShares MSCI Emerging Markets Indx (ETF) EEM, the two largest emerging markets ETFs by assets, have lost about $3 billion in assets after losing over $9.4 billion combine last year.

In 2015, EEM and VWO were two of the four worst ETFs in terms of lost assets.

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It's A Bargain Out There

Still, the valuation situation with emerging markets ETFs is reaching such low levels that “bargain” is an apt descriptor and the valuations currently being considered have not been seen in over a decade.

“After underperforming for the better part of the past five years, emerging market stocks, as measured by the MSCI Emerging Markets Index, are one of the few, genuinely cheap asset classes. At roughly 1.25x trailing book value, emerging market equities are trading at a level last seen at their trough in early 2009,” said BlackRock Global Chief Investment Strategist Russ Koesterich in a recent note.

For the five years ended 2015, 2012 was the only year in which EEM and VWO finished higher. That track record combined with an assortment of other issues, including tumbling commodities prices and currencies, have prompted some well-known investors to speculate the emerging markets slide is not over. Count Kyle Bass and Jeff Gundlach among the well-known investors in that camp.

However, devotees of valuation metrics have some good news to mull over.

“On a relative basis, using the MSCI World Index as a proxy for developed markets, EM stocks trade at nearly a 35 percent discount to developed markets, the largest such discount since the market bottom in 2003, according to an analysis of data accessible via Bloomberg,” added Koesterich.

On a country-by-country basis, there are myriad issues to be wary of with ETFs such as EEM and VWO. For example, Brazil and Malaysia have been plagued with corruption issues. Falling commodities prices are problematic for Russia and South Africa, among others. Those countries combine for 19 percent of the MSCI Emerging Markets Index.