Several years ago my portfolio included an emerging market ETF, Vanguard's (VWO), but with the onset of the recession I consolidated my holdings into a few ETFs that seemed safe, and an emerging markets ETF no longer struck me as a viable candidate. With the general air of uncertainty that has clouded over many foreign markets I thought it best to avoid re-introducing them to my holdings - at least for the time being. The question now is: is an ETF that focuses on emerging markets a good investment?
From BRICS to BIITS
My concerns may be well-founded. An October 21, 2013 article on Bloomberg.com by Shobhana Chandra, Simon Kennedy and Rich Miller argues that blanket investing may no longer be a reasonable approach to the emerging markets, and that the focus on BRICs (Brazil, Russia, India, China) might need to change to a focus away from BIITS (Brazil, India, Indonesia, Turkey and South Africa) - markets that are currently faring poorly.
More generally stated, investors need to evaluate emerging markets more individually, and rid themselves of the assumption that success in some emerging markets will spill over into others.
Fueling concerns about emerging markets are data from the IMF - in its October, 2013, projections - that show some of the prominent BRICS economies to be slowing down. The following table contains a list of countries (some identified by Chandra, et al) found to be troubling among the major emerging markets based on economic growth and currency strength (exchange rate compared to the U.S. dollar; all data indicate percentages; China is included for sake of comparison):
Difference from July 2013 Proj.
Currency Exchange Rate
1/1 - 9/23
5/22 - 9/23
Emerging Market ETFs
Emerging markets have been a popular target for ETFs - which are excellent examples of "blanket investing" - and the considerations above would seem to indicate that a look at the performance of some of those ETFs might be in order. ETF Database identified 81 ETFs that invested in emerging markets; of those, 45 have performed negatively, year to date, while 26 have performed positively (the remaining 10 showed "n/a" for YTD performance).
Interestingly enough, two of the three ETFs identified as BRIC-tracking are showing positive returns YTD: Guggenheim BRIC ETF (EEB), up 3.47% to $37.27; SPDR S&P BRIC 40 ETF (BIK), up 0.45% to $24.51. Each of these funds has substantial investments in China, with each having at least four China-based companies among their top-ten holdings.
Focusing more narrowly on each of the BRIC and BIITS countries, we find :
- Of the 13 ETFs focusing on Brazil, only one is positive: ProShares UltraShort MSCI Brazil (BZQ) - certainly not a good sign - up by 2.26% to $15.04
- A search for Russia-focused ETFs turned up seven results, only one of which was positive: Market Vectors Russia ETF (RSX), up 0.13% to $29.94;
- None of the 11 ETFs with a focus on India have performed well YTD: all had negative returns, ranging from -5.23% to - 37.59%;
- All three ETFs concentrating on Indonesia are negative for the year;
- ETF Database returned only one ETF focusing on Turkey, and it is negative YTD;
- As with Turkey, only one South Africa ETF was found, and it was negative.
(Note: prices of shares of the ETFs mentioned above and hereafter are for October 21, 2013.)
For the sake of comparison, a search was conducted for China-centric ETFs, which retrieved 17 results, six of which were performing negatively, two of which were listed as "n/a," and with nine ETFs posting positive performances YTD:
- iShares MSCI Hong Kong Index Fund (EWH), up 6.75% to $20.73;
- SPDR S&P China ETF (GXC), up 4.31% to $77.28;
- PowerShares Golden Dragon Halter USX China Portfolio (PGJ), up 60.02% to $30.66;
- Guggenheim China Small Cap ETF (HAO), up 10.21% to $26.44;
- First Trust ISE Chindia Index Fund (FNI), up 34.42% to $28.16;
- Guggenheim China All-Cap Fund (YAO), up 6.26% to 27.14;
- iShares MSCI China Small Cap Index Fund (ECNS), up 11.58% to $45.85;
- iShares MSCI Hong Kong Small Cap Index (EWHS), up 18.04% to $31.48;
- RBS China Trendpilot ETN (TCHI), up 17.56% to $29.59.
Also for comparison's sake, a search was done for all-world, ex-U.S. ETFs: 39 results were recovered, with five performing negatively, eight recorded as "n/a," and the remaining 26 showing positive performance so far this year. For sake of brevity, I will avoid listing them here.
Chandra, Kennedy and Miller certainly seem to have identified an important caveat when it comes to investing in emerging markets: investors must be careful - at least for the present - when looking for equities and/or ETFs. The authors echo the sentiment of the IMF when they caution that a significant factor in the future of the emerging markets will be the response of those markets to the inevitable tapering of the third round of quantitative easing.
In Chandra, Kennedy and Miller's opinion, nations that "are less reliant on foreign finance or took advantage of easy money from Fed stimulus to strengthen their economies" will be better suited to perform well post-Fed. Among those countries they count South Korea, the Czech Republic, and Mexico (although the three ETFs that focus on Mexico are currently negative performers for the year).
As I see it, an investment that aims to cover emerging markets in general is fraught with risk. Anyone interested in emerging markets should choose carefully, either on a country-to-country basis, or focusing on particular companies. Another approach would be to invest in a general worldwide ETF that included some small portion of emerging market holdings among those of developed nations. In the long run, the "emerging-market market" is likely to be too uncertain until it can be determined just how much impact the Fed's tapering process will have outside the U.S.