Emerging Market ETFs Will Lead the Way out of a Correction

When the credit collapse gripped the entire world, it was the Emerging Market ETFs that recovered before their developed world counterparts. In fact, as often as everyone (myself included) discusses the “March lows,” emerging markets actually hit rock bottom in November 2008 and hit “higher lows” in March 2009.

The rest, as they say, is history. Emerging Market ETFs have jumped straight into the stratosphere and have significantly out-hustled U.S., Europe and Japan ETF investments.

Now, with the volatility and “correction” throwing everyone for an uncertainty loop, it’s critical to take a look at the recent past. For example, the iShares Emerging Markets Fund (EEM) peaked on June 1 and bottomed on July 8 during an 11% pullback; meanwhile, the S&P 500 SPDR Trust (SPY) peaked on June 12 and bottomed on July 10 during its 7% sell-off period. In other words, emerging markets fell first and they recovered first.

Flash forward to October. The U.S. was celebrating its earnings victories. Dow 10,000 was all the “rage.” And only a few market watchers seemed to notice that the iShares Emerging Markets Fund (EEM) had not joined the S&P 500 SPDR Trust (SPY) hitting new highs on 10/19/09; rather, EEM had its best finish on 10/14/09.

Once again, emerging markets, perhaps because they are the riskier assets, were the first to struggle. And if the pattern continues (the pattern from November 2008 as well as the one from July 2009) you’d have to expect emerging markets to come back to life before the U.S. and other developed world ETFs.

The question is: Did the first day of trading in November (11/2/09) mark the start of anything upbeat? The iShares Emerging Market Fund (EEM) maintained a sunnier disposition than U.S. and European ETFs throughout the Monday session. However, until riskier assets are embraced with a little more “separation,” you may want to tread lightly.

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

[Michael Clark:]

Emerging markets correcting at the moment.

seekingalpha.com/insta...

EUM, Short Emerging Markets ETF, bottoming and ready to make next move up.

Nov 03 07:22 AM

[Mad Hedge F...:]

ple It all leaves me wondering, are there are snakes of a different variety lurking in the markets today? Many of the great long term plays I baled from on October 13 are suddenly a lot cheaper. The Canadian dollar (FXC) has plunged from $97.50 to $92, crude (USO) has backed off from $42 to $39, Baidu (BIDU) cratered from $440 to $355, and First Solar (FSLR) got whacked from $164 to $120. At these prices are they golden nuggets waiting to be scooped up from the ground? Or are they venomous vipers, coiled and waiting to strike an outreached hand? I vowed I would stay in cash for the rest of the year, until I lock in bonus payout. But if the best of breed investments drop much from here, I will be sorely tempted to nibble.

Nov 03 11:19 AM

[jay593:]

Emerging market funds, such as EEM and IFN merely trail the SPY and DIA. Thereis no way that they are going to run higher if DIA and SPY retrace or go lower. They trade like options on the american indexes, going higher or lower at a faster rate than SPY or DIA. They have no independant existence, although they should. Why the correlation, when the Indian economy is growing and the US economy contracting for the last few years. Can anyone explain.

Nov 09 03:08 AM