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By Carla Fried

It’s been hard to escape the Emerging-Markets-Sky-is-Falling meme that’s dominated headlines so far in 2014. And compared to the S&P 500 and the EAFE index of developed foreign markets, emerging markets, as shown via the performance of the iShares MSCI Core Emerging Markets ETF (NYSEARCA:IEMG) is indeed sorta ugly:

SPY Total Return Price Chart
(Click to enlarge)

SPY Total Return Price data by YCharts

Investment advisor Rick Ferri, whose Portfolio Solutions firm manages more than $1.2 billion has some useful advice for those wondering if it’s time to panic and flee: No. This is par for the course.

“….recognize that there’s a systematic boom, bust, and recovery cycle that has happened in emerging markets since the dawn of civilization,” wrote Ferri. He then goes on to recommend spending some quality time with the influential book This Time is Different: Eight Centuries of Financial Folly (Reinhart/Rogoff) to settle your nerves, as it lays out in detail the long history of said booms, busts and crises.

“You will be cured of emerging market jitters after reading a few chapters” Ferri surmises, ending with the advice that now is not the time to do anything different.

In fact, if you haven’t yet given your portfolio a rebalancing checkup in the past year, emerging markets could well be a candidate for adding to right now, given that this segment of the market is off more than 10% during a stretch where both an EAFE portfolio and the S&P 500 had double digit gains.

What’s getting less attention is the next-generation of emerging market funds. For all the Sturm und Drang over the currency woes and growth prospects of EM 1.0 markets including Brazil, Russia, South Africa, Indonesia and Turkey (dubbed the fragile five), EM version 2.0, represented by the the iShares MSCI Frontier 100 ETF (NYSEARCA:FM) has managed to stay above water so far in 2014. And since its launch 15 months ago has not only outperformed the EM 1.0 markets, but the S&P 500 and EAFE as well.

FM Total Return Price Chart
(Click to enlarge)

FM Total Return Price data by YCharts

At the risk of stating what should be quite obvious, that’s not to suggest investing in frontier markets -- we’re talking the likes of Kuwait, Qatar and the United Arab Emirates, which currently account for more than half of the $500 million ETF's portfolio -- is anything but volatile. But interestingly, when the first jolt of tapering sent all stock markets south last May, the iShares Frontier 100 lost less than 8% in a five-week stretch, compared to a slide of more than 13% for the iShares Core MSCI Emerging Markets ETF.

Source: Emerging Markets 1.0 Vs. Emerging Markets 2.0