Emerging Market ETFs Decoupled from Developed Markets?

There has been a lot of talk about how emerging markets and the exchange-traded funds that track them have decoupled from more developed markets. Not really. But the main point is that all these country ETFs move at different paces and over time a blend of them offer investors the potential of good returns with lower volatility.

Despite some weak returns during the past month, emerging equity markets and ETFs are still up so far this year. China’s Shenzhen market, for example, has risen 167 per cent in dollar terms in 2007. But all are off their highs for the year. Shenzhen B shares have lost a tenth of their value since October 16, while Brazil and Korea have fallen 6 per cent and 9 per cent respectively since October 31. Spreads on emerging market sovereign external debt have widened to 254 basis points over US Treasuries from less than 200bp in September, according to JP Morgan.

But according to the Financial Times, there is evidence that economic linkages between emerging and developed market ETFs have increased. Developed countries’ share of world trade has fallen from a peak of almost 80 per cent in 1972 to 55 per cent in 2006, according to the IMF. And China has replaced the US or Japan as the most important trading partner for Hong Kong, Taiwan, Korea, and Vietnam. But because export growth has grown faster than these countries gross domestic product, for many countries exports to the US now account for a greater share of GDP now than in 1995.

But look at just the last thirty days. Malaysia (EWM), Switzerland (EWL), Spain (EWP) and Germany (EWG) were all up marginally while Canada (EWC) lost 11.2%, China (FXI) lost 10.5% and South Korea (EWY) lost 7.2%. Having a variety of different country ETFs in your portfolio and Chartwell's ETF Country Rotation strategy still adds value.