30 Emerging Market ETFs - Risk vs. Reward

Returns from emerging markets stocks are highly correlated to those from U.S. stocks. Also, many people believed that those countries’ growth prospects were hardly a secret, and they had been more than priced into stocks. Still, from price/earnings to growth (PEG) ratio point of view (a ratio used to determine a stock's value while taking into account earnings growth, according to Investopedia), emerging countries’ PEG is still better than SPY’s, which is 1.4.

From a total of 835 ETFs, I filtered out those ETFs with net assets less than $100 million and average volume less than 100,000. Below are 30 emerging market ETFs, along with their PEG and Price to Cash Flow (CF) ratio.

#	Fund Name	Ticker	PEG	Price/CF
1	iShares MSCI Emerging Markets Index	(EEM)	0.9	6.5
2	Vanguard Emerging Markets Stock ETF	(VWO)	0.7	4.5
3	iShares MSCI Pacific ex-Japan	(EPP)	1.4	5.4
4	iShares S&P Latin America 40 Index	(ILF)	1.1	9.4
5	iShares MSCI All Country Asia ex Jpn	(AAXJ)	0.9	4.8
6	SPDR S&P Emerging Asia Pacific	(GMF)	1.0	4.7
7	Claymore/BNY Mellon BRIC ETF	(EEB)	0.5	4.5
8	iShares MSCI BRIC Index	(BKF)	1.0	6.0
9	SPDR S&P BRIC 40	(BIK)	1.0	5.8
10	iShares MSCI Brazil Index	(EWZ)	1.0	4.8
11	iShares MSCI Chile Investable Mkt Idx	(ECH)	1.4	4.6
12	iShares FTSE/Xinhua China 25 Index	(FXI)	1.0	6.3
13	PowerShares Gldn Dragon China	(PGJ)	0.6	5.6
14	SPDR S&P China	(GXC)	0.9	5.9
15	iShares MSCI Hong Kong Index	(EWH)	0.8	6.3
16	iPath MSCI India Index ETN	(INP)	1.0	6.5
17	WisdomTree India Earnings	(EPI)	0.7	6.2
18	PowerShares India	(PIN)	1.0	7.2
19	iShares MSCI Malaysia Index	(EWM)	1.4	8.4
20	iShares MSCI Mexico Investable Mkt	(EWW)	1.2	6.3
21	Market Vectors Russia ETF	(RSX)	2.2	1.4
22	iShares MSCI South Korea Index	(EWY)	0.9	4.0
23	iShares MSCI Singapore Index	(EWS)	1.5	2.1
24	iShares MSCI South Africa Index	(EZA)	0.9	5.9
25	iShares MSCI Taiwan Index	(EWT)	1.6	4.0
26	iShares MSCI Turkey Invest Mkt Index	(TUR)	0.5	0.9
27	UltraShort MSCI Emerging Mkts	(EEV)
28	Direxion Daily Emrg Mkts Bull 3X	(EDC)
29	Short MSCI Emerging Mkts ProShares	(EUM)
30	UltraShort FTSE/Xinhua China25	(FXP)

Those ETFs can be divided into 4 categories: broad market index, regional/group, individual country and speculation.

Broad Market Index

Among these 4 categories, it is the safest way to play emerging market. #1 EEM and #2 VWO are the most populate emerging market ETFs. However, they are still more volatile than U.S market. Both EEM and VWO’s beta are 1.3.

The following charts show short term (1-year) and long term (since its inception, April 2003) comparison between SPY and EEM. As you can see, in both periods EEM all out performed SPY.

Short-Term (EEM in blue, SPY in red):

Long-term:

BLDRS Emerging Markets 50 ADR Index (ADRE) might be another choice, when you decide to swap for tax-loss purpose.

Regional ETFs

If you want to cherry pick certain regions in the world, you can pick from #3 - #9.

Country ETFs

#10-#26 are sorted by country. Most of non-intraday data, such as P/E, growth % and cash flow are updated quarterly. For example, iShares MSCI Turkey Invest Mkt Index ‘s TUR price has been up around 30% since June 30, 2009. That’s why it might be better to look at real time data such as 52-week price range. Investors need a strong stomach to handle price swing for individual country ETF, such as $18 - $51 for TUR within 52 weeks.

Speculation

#27-#30 are leveraged or short ETFs for you to express your strong feelings about emerging market, whether it is undervalued or overpriced. However, when you are using these weapons of mass destruction, you should be aware that leveraged ETFs had daily tracking objectives, and are not appropriate for long-term buy-and-hold investors. For example, the complaint against EEV, filed by U.S. firm Gilman and Pastor, notes that the fund was designed to track twice the inverse of the MSCI Emerging Markets index. From Jan. 2, 2008 to Dec. 17, 2008, the MSCI Emerging Markets index fell by 52%, while EEV fell approximately 30%, according to TheStreet.com. In theory, EEV should be UP by 104%.

Conclusion

In Sep/Oct, there are lots of things for concern. Charles Ortel, managing director of Newport Value Partners has coined the term "skew-flation" to describe what's ahead: the "worst of all worlds" is coming, characterized by falling asset prices and higher taxes, accompanied by a rising cost of core goods and services. There's too much productive capacity around the world and not enough demand. At the same time, private sector incomes are down while debt levels are up.

Nonetheless, if you decide to participate in the market, and you slept well when MSCI Emerging Markets index fell over 50% last year, it doesn’t hurt to allocate small portion of your portfolio in emerging markets, as long as you understand they are 30% more volatile than US market.

High risk, high reward.

Disclosure: I have a long position on EEM. All data is from Yahoo Finance as of Sep 13, 2009.

Comments

[me3tv:]

So ... as things are now so iffy regarding more immediate upside potential, why not just wait a bit and then sink some teeth into some of these ETFs. IT seems a big drop is due .. though admittedly I have been saying that for a month and the thing keeps going up. I know - as soon as I buy one of these -- that will be when the pin pricks this current bubble.

Sep 14 09:47 AM

[Alan Young:]

This is not at all clear. What time period are you using to compute P/EG? How do you measure "earnings" and cash flow of an ETF--from the earnings/CF of its component stocks? Most ETFs don't compile those figures, so I wonder how you got them. And of course, ETFs don't have "earnings" and "cash flow" separate from their holdings, or at least not in a way that's relevant to their investment thesis, so I don't know what else it could mean. If you compiled all this info by looking up hundreds of individual stocks yourself, that's a terrific contribution; but somehow I doubt that.
So I'm just confused... please clarify.

Sep 14 12:41 PM

[Hao Jin:]

finance.yahoo.com/etf/...

P/E is in the 6th column. Earnings Growth is in the last column. PEG = PE/G. Please note those are historical data.



On Sep 14 12:41 PM Alan Young wrote:

> This is not at all clear. What time period are you using to compute
> P/EG? How do you measure "earnings" and cash flow of an ETF--from
> the earnings/CF of its component stocks? Most ETFs don't compile
> those figures, so I wonder how you got them. And of course, ETFs
> don't have "earnings" and "cash flow" separate from their holdings,
> or at least not in a way that's relevant to their investment thesis,
> so I don't know what else it could mean. If you compiled all this
> info by looking up hundreds of individual stocks yourself, that's
> a terrific contribution; but somehow I doubt that.
> So I'm just confused... please clarify.

Sep 14 06:37 PM

[SeekingTruth:]

Superb article, and as long as you are doing all calculations consistently, it gives us some safeguards.
Of course Free Cash Flow can be calculated differently and it would be helpful to know the formula that you used.
Would be pleased to see more of same from you in the future. Thanks again for your fine work.

Oct 27 01:51 PM