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EM ETFs: A Contrarian Bet or Value Trap?

The year 2018 has so far been pretty upsetting for emerging market (EM) ETFs.The main cause of the EM pain in the first half was the dollar rally, which is why they witnessed the “worst start to a year since the 2013 taper tantrum.” As talks of faster-than-expected Fed rate hikes started doing rounds, U.S. Treasury yields moved higher and the greenback gained strength and EM ETFs fell flat.

Then came the turmoil in Turkey and Argentina in August. The double whammy had a spiraling effect on the EM currencies. Plus, there have been ongoing trade tensions between the United States and China.

Many emerging market assets are trading at record lows. Emerging market GDP growth declined to 4.1% in August from 4.3% in July, the lowest since April 2016, according to estimates from the Institute of International Finance, as quoted on CNBC.

Buy the Dip in EM ETF?

Many are considering this a buying point. Goldman Sachs Asset Management is purchasing government debt from Turkey and Argentina as it finds these markets capable of offering more profitable bond trades in 2018, as reported by Bloomberg. The agency believes that the selloffs are exaggerated.

A portfolio specialist at T. Rowe Price recently commented that “emerging market valuations, based on 2019 price to earnings ratios, have fallen to discount levels, compared with their historical averages and relative to developed markets.” 

The strategist sees opportunity in “private banks in Brazil and India, insurance companies in South Africa and China, and equities of internet and financial holdings in Russia.” Some are even of the view “that the end of the Fed's interest hike cycle may be coming into sight (read: Has EM Selloff Bottomed Out? ETFs to Tap).”

Some Analysts Are Skeptical Too

Though long-term fundamentals are positive, some analysts cautioned that valuations could still take a dive further, due to market sentiment. The Indian rupee is at a record low. China’s trade relation with the United States are getting sourer; Brazil and Argentina are not out of upheaval.

Indonesia’s currency is also struggling as investors dumped emerging markets with current account and fiscal deficits. Moreover, if the Fed starts raising rates faster in the coming days, more pain could come for the EM bloc. Even if emerging market currencies are recovering, any flare up in trade tensions and a hawkish Fed or ECB may disrupt the winning momentum (read: Are All of 'Fragile Five' EM ETFs Equally Frail?).

Against this backdrop, below we highlight a few ETFs that have rebounded and offered solid returns in the past month compared with 1.5% gains in iShares MSCI Emerging Markets ETF EEM. These are (read: Turkey ETF Surges Post Rate Hike):

iShares MSCI Russia ETF ERUS – Up 6.4%

iShares MSCI Turkey ETF TUR – Up 6.3%

SPDR S&P Emerging Markets Dividend ETF EDIV – Up 3.3%

Schwab Fundamental Emerging Markets Large Company Index ETF FNDE – Up 2.7%

Invesco FTSE RAFI Emerging Markets ETF PXH – Up 2.4%

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SPDR-SP EM DVD (EDIV): ETF Research Reports
 
ISHRS-MSCI TURK (TUR): ETF Research Reports
 
SCHWAB-F EM LCI (FNDE): ETF Research Reports
 
ISHARS-EMG MKT (EEM): ETF Research Reports
 
PWRSH-F/R EMP (PXH): ETF Research Reports
 
ISHARS-MS RUSSA (ERUS): ETF Research Reports
 
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