Emerging Markets ETFs: Predictable and Consistent

by: Herb Morgan

Herb Morgan (Efficient Market Advisors, LLC) submits: Weather and equity markets have a lot in common. Predicting them with consistent accuracy is extraordinarily difficult and “fat tail” performance patterns are regularly reversed in a sudden and ferocious manner.

Just a few short weeks ago people had written off the ski season in the Western Sierras, citing snow fall significantly below the traditional numbers. Unsurprisingly, the “weather market” has corrected the fat tail performance abruptly dumping multiple feet of sweet powder on the slopes over a few short days.

I have been politely criticized by contributors to Seeking Alpha for my decision to exclude all emerging markets ETFs from our client portfolios. Certainly my conservatism has had its opportunity cost over the last few years. In true predictable and consistent form, emerging market ETFs are entering the early stages of a major correction.

Tuesday, 9 exchange traded funds based on emerging Asian markets corrected unsustainable performance patterns triggered by a Shanghai stock market that plummeted nearly 9% overnight:

ETF, Drop
IShares:FTSE/Xinhua (NYSEARCA:FXI), -9.9%
PowerShares Golden Dragon ETF (NASDAQ:PGJ), -9.6%
IShares MSCI Emerging Market ETF (NYSEARCA:EEM), -8.1%
Vanguard Emerging Markets ETF (NYSEARCA:VWO), -7.3%
IShares MSCI Hong Kong Index Fund (NYSEARCA:EWH), -7.4%
iShares MSCI Taiwan Index Fund (NYSEARCA:EWT), -6%
iShares MSCI South Korea Index Fund (NYSEARCA:EWY), -6.4%
iShares MSCI Singapore Index Fund (NYSEARCA:EWS), -7.8%
iShares MSCI Malaysia Index Fund (NYSEARCA:EWM), -9%

My rejection of emerging markets for our client portfolios was never based on a disbelief in the expansion of economic activity in the region but rather on a firm conviction of the ability of such markets to deliver sudden and seemingly unexpected corrections. It remains my position that emerging markets present a disfavorable risk reward relationship and that further weakening can be expected in the near term.

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