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Wayne Lin manages money at Baltimore-based Legg Mason, Inc. In a phone interview with the folks at Bloomberg, he explained that many investors have been surprised by the significant underperformance of emerging market equities in the global "risk-on" rally.

How anemic have the upside gains for emergers been? Since the October lows of 2011, Vanguard Emerging Markets (NYSEARCA:VWO) is up roughly 22%. Meanwhile, the S&P 500 SPDR Trust (NYSEARCA:SPY) has tacked on 48%. The idea that emerging market stocks provide greater rewards for the risk has been stymied.

And it gets worse. SPY is knocking at the doors of all-time records and sits comfortably above key 50-day and 200-day trendlines. VWO? It is well below its 50-day and it may struggle to maintain support at its 200-day.

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In a column that I wrote three weeks ago, "Bigger Than A Dow Record… U.S. Stock ETFs Decouple From Foreign Stock ETFs," I noted that we had yet to experience a 10% correction in U.S. stock assets since the October 2011 lows. That's nearly 18 months of relative equanimity. What's more, U.S. stock ETFs have been rising without incident for roughly 20 weeks.

The same cannot be said about emerging stock ETFs. Three of the component countries that constitute the BRIC acronym have entered a technical downtrend; the corresponding ETFs are Market Vectors Russia (NYSEARCA:RSX), WisdomTree India (NYSEARCA:EPI), and iShares MSCI Brazil (NYSEARCA:EWZ).

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Even during periods of underachievement, it is rare to witness decoupling of the current magnitude. The difference in direction over the initial quarter of 2013 is nearly as dramatic as inverse ETFs.

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It is possible for one to take an individual country approach. However, even the best performing emergers in 2013 have not been able to match the stunning success of the SPY thus far. Even if they had kept up, they would have done so with more beta risk.

5 Best Emerging Market Country ETFs: Country Picking Still Coming Up Short
Approx YTD %
iShares MSCI Thailand (NYSEARCA:THD) 7.6%
Market Vectors Indonesia (NYSEARCA:IDX) 7.0%
iShares MSCI Turkey (NYSEARCA:TUR) 2.4%
iShares MSCI Chile (NYSEARCA:ECH) 1.9%
iShares MSCI Mexico (NYSEARCA:EWW) 1.8%
SPDR S&P 500 Trust (SPY) 9.3%

Astute investors may remember periods when different assets tended to move in the same direction for a period of time. For instance, there were moments in the previous decade when traditionally non-correlated assets like gold, U.S. stocks, and U.S. treasury bonds all moved in the same direction. Yet those periods in which they moved together eventually reverted back to traditional price patterns.

It follows that I expect the 2013 "decoupling event" to end in one of two possible outcomes. Emerging market stocks may begin to move substantially higher, bouncing off 200-day trendline resistance and joining the bullish uptrend of U.S. stocks. Conversely, emergers may be telling risk-on U.S. investors something they'd rather not hear; that is, the further foreign equities fall below respective trendlines, the more likely it is that U.S. stocks will hit their own corrective patch.

For now, there may be little reason to sell. Even profit-taking should come with a specific plan for how and when to sell portfolio assets. What's more, if there's any trimming to be done, it may have to come with the loss-leading emerging market investments that would hit protective stop-limit orders sooner.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

Source: Emerging Market Stock ETFs: Too Much Risk For Too Little Reward?