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Emerging markets exchange traded funds have been lagging U.S. stocks badly in 2011, but recent flow data suggests investors are positioning for a recovery in the group.

The iShares MSCI Emerging Markets (NYSEArca: EEM) is down 11.9% so far this year, while SPDR S&P 500 (NYSEArca: SPY) has managed a slight gain of 1.8%, according to Morningstar.

The emerging market ETF was the top seller in October, however.

Emerging markets are known for their big performance swings, so the ETFs are more volatile than funds indexed to U.S. blue chips. The funds have been punished this year on the Eurozone sovereign debt crisis.

Developing economies such as China and Brazil are growing faster than the U.S. and Europe, which are dealing with budget deficits and high debt levels. However, betting on emerging markets hasn’t worked out in 2011, writes Matthew Craft for the Associated Press.

“If you were anywhere in the world other than in the S&P 500 this year, you got crushed,” Greg Peterson, director of research at Ballentine Partners, said in the AP report.

Indeed, emerging markets have a long history of frustrating individual investors unable to stomach the volatility.

Brazil’s economy expanded 3.1% over the past year, while China had economic expansion registering at 9.1%, according to the AP report. Yet both markets are lower this year.

“Anytime you see risk and fear coming, you see emerging markets get hit a bit more,” Nathalie Wallace, a senior portfolio manager at Batterymarch Financial Management, said. “It doesn’t mean the underlying fundamentals of the economy have changed.”

Overall, the global economy does appear to have a slowdown trend in the making. Analysts say that valuations within the emerging markets sector are reflecting a deep slowdown.

Europe’s banks provide about two-thirds of the foreign lending to global emerging economies.

“The possibility that European banks might reduce their exposure to Asia as part of their recapitalization effort is something that has to be taken seriously,” Michael Spencer of Deutsche Bank told clients, warning of risks to the likes of Vietnam, South Korea, Indonesia and India.

Broad-based emerging market ETFs:

  • iShares MSCI Emerging Markets
  • Vanguard Emerging Markets ETF (NYSEArca: VWO)
  • SPDR S&P Emerging Markets ETF (NYSEArca: GMM)
  • Schwab Emerging Markets ETF (NYSEArca: SCHE)

Vanguard Emerging Markets ETF - (click to expand)


Tisha Guerrero contributed to this article.

Full disclosure: Tom Lydon’s clients own SPY.

Source: ETF Investors Position For Emerging Markets Rebound