To say emerging markets equities and exchange traded funds have been jilted be the stronger U.S. dollar and increased speculation that a rate hike by the Federal Reserve is imminent is an understatement.
If not for a plethora of commodities-related ETFs, emerging markets funds would have a heavy a footprint among the worst-performing ETFs over the past several months. As it is, an average loss of 14.3 percent over the past 90 days for the Vanguard FTSE Emerging Markets ETF (NYSE:VWO) and the iShares MSCI Emerging Markets ETF (NYSE:EEM), the two largest emerging markets ETFs by assets, is not going to illicit confidence among investors.
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As some single-country ETFs are proving --think Brazil funds--isolating individual developing economies has proven no more efficacious than investing in diversified funds such as EEM and VWO. Slack performances by emerging markets ETFs tracking stocks from Bangkok to Sau Paulo to Warsaw are prompting investors to think 2015 is a sequel 2013's taper tantrum when emerging equities were punished on rate hike fears.
But even if we see a similar pattern this time around, its important to remember that not all emerging markets are created equal. Emerging markets have become an increasingly heterogeneous asset class, and I believe those emerging economies with the following characteristics are better positioned than others to withstand capital withdrawal from financial investments, said BlackRock Chief Investment Strategist Russ Koesterich in a recent note.
One avenue for playing emerging markets endorsed by Koesterich is with countries that are commodities importers. Among developing economies, there is no bigger commodities importer than India. Perhaps that explains why the WisdomTree India Earnings ETF (NYSE:EPI) is up almost 3 percent over the past 90 days, a period in which the largest Brazil ETF has plunged almost 27 percent.
As Benzinga reported earlier this month, India small-cap ETFs, such as the Market Vectors India Small-Cap Index ETF (NYSE:SCIF) and the iShares MSCI India Small-Cap ETF (BATS: SMIN), have been surging in recent weeks, soundly outperforming other single-country emerging markets.
Other developing nations that have the potential to weather hawkish changes in Fed policy are those with ample foreign currency reserves and current account surpluses.
One example of a market better positioned to withstand capital withdrawals is Malaysia, which has amassed a current account surplus and significant foreign exchange reserves thanks to export-driven economic growth. International Monetary Fund and World Bank data show that since 2005, Malaysian current account-to-gross domestic product (GDP) and foreign exchange-to-GDP measures have consistently beaten an average of 21 large emerging market economies on a quarterly basis, notes Koesterich.
Other examples include South Korea and Taiwan. However, highlighting the turbulent environment faced by emerging markets investors, the iShares MSCI Malaysia ETF (NYSE:EWM), iShares MSCI South Korea Capped ETF (NYSE: EWY) and the iShares MSCI Taiwan ETF (NYSE:EWT) have posted an average three-month loss of 15.6 percent.
All three of those ETFs hit 52-week lows last Friday and in the case of EWY and EWT, those funds are being hindered by slack performances by technology giants. Samsung is dragging EWY lower while faulty fundamentals in the semiconductor space are plaguing EWT, an ETF that devotes almost 23 percent of its weight to Taiwan Semiconductor (NYSE:TSM).
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