Rethinking Emerging Market ETFs in Your Globally Diversified Portfolio

by: Gary Gordon

Last week, the Dow charted eight straight weeks of gains. It looks poised to make it nine consecutive victories. In fact, the media seem more inclined to talk about Dow 12000 than the equally conspicuous difficulties for the MSCI Emerging Market Index.

At the time of this writing, the emerging market index tracker, Vanguard Emerging Markets (NYSEARCA:VWO), struggled to remain above its 50-day trendline. That might not be a big a deal ... were it not for the tribulations of a half-dozen individual country ETFs.

In a three-month period of rolling returns where the S&P 500 packed on 9.2% and the Dow Industrials garnered 7.7%, consider:

1. Both WisdomTree India Earnings (NYSEARCA:EPI) and SPDR S&P China (NYSEARCA:GXC) are down more than -10% from November highs. Two of the four country funds in the BRIC emerging market paradigm are declining due to widespread inflation in Asian economies. Thailand (NYSEARCA:THD) and Indonesia (NYSEARCA:IDX) have been hit by the same bug.

2. Resource-rich Latin American countries like Peru and Chile have been hit by multiple forces. The potential for slower growth in Asia implies less demand for metals/materials, while developed market currency depreciation relative to Latin American currencies implies less profitability from exporting. iShares Chile (NYSEARCA:ECH) and iShares Peru (NYSEARCA:EPU) have already corrected by -10%.

3. England’s Office for National Statistics reported an unexpected, if not somewhat shocking, economic contraction of -0.50% for the fourth quarter. Equally shocking, perhaps, is that European and U.S. markets didn’t sell off as dramatically as emergers. Why not? England’s economic weakness implies that developed economies will still require fiscal and monetary stimulus. In complete contrast, emerging market countries are being forced to tighten economic belts to fight inflation. One of the hardest hit funds? First Trust China-India (NYSEARCA:FNI) down -1.6% as I type.

If major emerging markets are able to get it right, they’ll avoid an inflationary bear of -20% declines. Yet engineering a soft economic landing may be far more challening for emerging country governments/central banks than at first glance.

It follows that investors may have to pare back their over-reliance on emergers to “juice” their globally diversified portfolios. Or at the very least, they’ll need to become far more selective. iShares South Korea (NYSEARCA:EWY), which sometimes receives the erroneous label of emerger, has weathered the ”inflation frustration” better than most. iShares Taiwan (NYSEARCA:EWT) ... and iShares MSCI Malaysia (NYSEARCA:EWM) ... same thing.

In other words, you may not be able to rely too heavily on pan-emerging market funds or “BRIC” or the wrong individual countries. What’s more, you should make sure to employ stop-limit loss orders to minimize the risk of a bearish downturn for emerging market equities.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.