'Risk-Reward' Investing Strongly Favors Emerging Market ETFs

by: Gary Gordon

Money has been flowing out of stock assets at a steady pace. Macroeconomic data has been decidedly weak. And unless you hopped aboard the gravy “grains” this past week, a Great White took a bite out of your portfolio.

(Or maybe a brown bear is responsible for the mauling. I don’t think it was a brown bear, though. So let’s just call it a shark.)

For the second time since the U.S. stock correction began in late April, Mr. Market cried, “Uncle.” The first time was back in mid-June, when the S&P 500 briefly climbed back above its 200-day trendline. It didn’t last, though.

Here in August, Mr. Market literally begged Uncle Ben Bernanke for more monetary stimulus at Tuesday’s Fed meeting. The Fed Chairman complied, yet U.S. stocks still finished out the week with huge losses.

Worse yet, the S&P 500 SPDR Trust (NYSEARCA:SPY) has failed to hold above its 200-day moving average on two separate occasions. Technicians must be baffled by the multiple whipsaws — a whipsaw occuring when a prospective “buy signal” is quickly overturned by a “sell signal.”

SPY 200

An eternal optimist might point out that it’s virtually impossible to find a 20-year rolling return where stock assets haven’t achieved an excess return/gain over U.S. 10-year treasuries. One might also be taken in by the reality that economic growth as anemic as 2% is still plenty strong for corporations to grow their profits/revenues.

With that said, it’s impossible to ignore several overarching facts about stock ETFs right now. First, emerging market ETFs are losing less on the downside and they are making more on the upside; that’s a better risk-reward scenario. Second, most emerging market ETFs (e.g., individual countries, regions, thematic, etc.) are experiencing technical uptrends.

Here’s a breakdown of 10 popular ETFs — 5 emergers and 5 U.S. In addition to identifying performance on the week, I’ve noted the “Risk Grade” from RiskGrades.com. (Note: The lower the number, the lower the standardized risk.)

5 Popular Emerging Market Country ETFs
Approx % Risk Grade
iShares MSCI Chile (NYSEARCA:ECH) 0.52% 101
iShares MSCI Thailand (NYSEARCA:THD) -1.10% 112
Market Vectors Indonesia (NYSEARCA:IDX) -1.67% 155
Market Vectors Small Cap Brazil (NYSEARCA:BRF) -2.92% 141
iShares MSCI Turkey (NYSEARCA:TUR) -4.44% 162
5 Popular U.S. Stock ETFs
Dow Diamonds Trust (NYSEARCA:DIA) -3.13% 95
S&P SPDR Trust (SPY) -3.63% 107
PowerShares Nasdaq 100 (QQQQ) -4.36% 112
S&P SPDR MidCap 400 (NYSEARCA:MDY) -4.65% 130
iShares Russell 2000 (NYSEARCA:IWM) -6.25% 151

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.

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