Gauging the Emerging Market ETF Correction

U.S stocks have hit fresh 10-week lows. In fact, the S&P 500 has pulled back -6.8% from its recent closing high on June 11.

With the correction of the U.S markets becoming increasingly clear by the day, many "green shoot" believers are more concerned about the well-being of emerging markets. After all, the consensus seems to be that... while "emergers" were the last into the muck... they're going to be the first out.

Emerging Market Correction
					% Decline From Recent High
SPDR S&P Emerging Europe (GUR)						-20.0%
SPDR S&P Emerging Latin America (GML)						-11.6%
SPDR S&P Emerging Asia Pacific (GMF)						-9.2%
SPDR S&P Emerging Middle East/Africa (GAF)						-5.6%
SPDR S&P Emerging Markets (GMM)						-8.5%

One of the first things that is noticeable is the reduced risk associated with investing across all emerging markets. Not only is SPDR S&P Emerging Markets (GMM) performing better than 3 of the 4 identified regions, but Vanguard Emerging Markets (VWO) is also down less at -8.8%. More often than not, diversifying across an entire segment like emerging stocks leads to better risk-reward outcomes than choosing individual countries, or even regions.

Next, the unruly 20% slide for SPDR S&P Emerging Europe (GUR) is a direct result of a 50% energy weighting. In fact, GUR has a 20% weighting in Gazprom, Russia's gigantic oil enterprise. In effect, most of the downside activity here is a direct result of crude oil's move from the high $70s per barrel to the low $60s per barrel.

In complete contrast, SPDR S&P Emerging Middle East/Africa (GAF) has negligible exposure to energy at about 5%. The fund is primarily tilted 60% towards materials, financials and telecom of South Africa, with the Middle East exposure directly corresponding to Israel's Teva Pharmaceuticals. (Note: I once called this fund the South Africa/Israel Fund because the actual name is deceptive.)

In essence, the take-away here is two-fold. First, the -8.5%/-8.8% drop for emerging markets as a whole is not extreme. Adjusted for beta risk, with the S&P down -6.8%, the emerging market drop may even be on the light side.

Second, trying to ascertain which emerging region will out-duel another is likely an exercise in futility... especially over more significant lengths of time like 5 and 10 years. Granted, my heart, mind and educational experience all scream, "Emerging Asia" with an investment like SPDR S&P Emerging Asia Pacific (GMF). Yet I can't deny the greater likelihood over an entire decade that a more diversified Vanguard Emerging Markets (VWO) should come out ahead.

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[Mad Hedge F...:]

Sell now so you can buy the dip. Given the profusion of negative indicators, and moving averages rolling over like the Bismarck, I would be remiss in my public duties if I did not tell you to sell everything. Dump the reflation trade. The “green shoots” are dead. Liquidate emerging markets (EEM), commodities (DBA), the metals (GLD), foreign currencies (XEU), and cover your shorts on safe haven pays, like Treasuries (TBT) and the yen (XJY). Real estate in all forms will continue to die its own private death. Batten down the hatches. Reduce your risk. If you can’t sell, then hedge your positions. If you can’t hedge, then sell calls against your positions. If you can’t sell calls, then find another line of work, because there are so many inverse ETF’s around these days, you no longer have an excuse to take a big downside hit. This is where your stops earn their pay. I begged you, pleaded with you, and beseeched you to dump your position on May 1 (see “Sell and May and Go Away” and June 16 see “The Worm has Finally Turned” , and now I am trying again. Please also revisit the short plays I offered earlier on the S&P 500 (SDS) and the Euro (DRR) . And don’t ever call me indecisive, waffling, or equivocating.

Jul 08 02:44 PM