Investors Tiptoe Back Into Emerging Market ETFs

by: Gary Gordon

April was the best month for U.S. stocks in 2011 and analysts were quick to offer explanations. The most common interpretation? The markets were pleasantly surprised by the fact that 75%-80% of corporations beat their earnings and revenue forecasts.

Of course, revenue-generating, profit behemoths owe most of their success to sales in the developing world. The greater the U.S. presence in emerging economies, the better the “beat.”

The heart of the bullish case for stocks and commodities hasn’t changed since the bull’s inception in March of 2009. Specifically, we’ve got scores of developing countries that need more stuff - raw and finished product - than ever before.

Surprisingly, many analysts failed to examine money flow. For example, in the first week of April, emerging regions from Eastern Europe dominated equity fund inflow. In the same vein, on Friday, April 29, three of the greatest upside volume surprises were iShares Asia 50 (NYSEARCA:AIA), WisdomTree Emerging Currency (NYSEARCA:CEW) and WisdomTree World Growth excl U.S. (NYSEARCA:DNL).

The evidence in favor of emerging market intrigue doesn’t stop there. On Monday, May 2, $75 million in new assets flowed into WisdomTree Emerging Equity Income (NYSEARCA:DEM). That’s a 5%-plus increase in assets under management, while share volume was 7x greater than average. (Note: DEM had a relatively remarkable April with 5.7% capital appreciation of its own.)

In recent columns, I’ve demonstrated how investors are becoming wary of U.S. sectors that are sensitive to the performance of the U.S. economy (e.g., energy, financials, industrials, etc.). They’ve been opting for consumer staples and healthcare instead. (See Volume Breadth Favors “Defensive” ETFs and “Risk-Sort-Of-On” Trade Favors Dividend ETFs.) I believe that a similar phenomenon is occurring with Emerging Market ETFs.

Consider the April performance gains for lower-risk emerging funds:

Approx % For April 2011
WisdomTree Emerging Market Small Cap Dividend (NYSEARCA:DGS) 5.7%
WisdomTree Emerging Market Equity Income (DEM) 5.7%
SPDR Emerging Market Dividend Fund (NYSEARCA:EDIV) 4.6%
Vanguard Emerging (NYSEARCA:VWO) 3.4%
Vanguard Dividend Apprec (NYSEARCA:VIG) 3.5%
SPDR S&P 500 Trust (NYSEARCA:SPY) 2.9%

Although there are limited choices for dividend-oriented or equity income emerging funds, all three in the table above outperformed Vanguard Emerging Markets (VWO). The same can be said for U.S. ETFs such that ... dividend offerings may have been less risky in the eyes of buyers.

The recent popularity and enhanced performance of vehicles like DEM, DGS and EDIV may be attributable to ”conflicting sentiment.” On the one hand, foreign stocks may be fairly valued hedges against dollar devaluation. On the other hand, the presumption that many will “sell in May and go away” keeps others from committing to the economically sensitive, inflation-anticipating Vanguard Emerging Markets (VWO).

In brief, emerging income investing and emerging dividend investing appeal to those who are willing to stick their toes in the waters. They’ll receive an annualized income stream from less price volatile holdings while the world figures out where in the global industrial cycle it stands.

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.