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Emerging Market ETFs Show Widely Varying Views


Picking the right emerging market country is vital to improving your returns in this arena.

The iShares MSCI Emerging Market Equity ETF (NYSEARCA:EEM) has been a serial underperformer over the last several years as the global recovery has extended to new heights. This widely held mix of stocks from numerous emerging market nations has been unable to mount any serious bid for reflation despite the continued strength of domestic markets.  A quick comparison between EEM and the iShares Core S&P 500 ETF (NYSEARCA:IVV) shows that the 3-year annualized returns in each index stand at -2.67% and +16.10% respectively as of 12/31/13. 

Recent fund flow data continues to suggest that investors are fleeing emerging markets in record numbers and placing their bets in developed markets. According to, EEM has lost nearly $8 billion year-to-date, while the Vanguard FTSE Europe ETF (NYSEARCA:VGK) has gained over $1.6 billion in new money. This divergence suggests that investors are shifting their international exposure to areas that they feel will continue to provide stronger returns over the next several years. 

Emerging markets have also suffered from the recent geo-political turmoil of the clash between Russia and Ukraine which sent the Market Vectors Russia ETF (NYSEARCA:RSX) to multi-year lows this week. The risk of a potential military conflict in this region was enough of a reason to send Russian stocks lower, and lack of investor confidence in this region may lead to more selling in the near future. 

Another emerging market nation that is struggling to reverse years of declining stock prices is Brazil. The iShares MSCI Brazil Capped ETF (NYSEARCA:EWZ) has suffered from concerns about slowing growth and high inflation, which has put downward pressure on equities.  In addition, this country's economy is highly correlated to commodity prices, which have been in a long-term downtrend as well. 

Trying to pick a bottom in these countries has been analogized to catching a falling knife. However, there are still several pockets of strength in emerging markets that investors should be shifting their focus to. 

The WisdomTree India Earnings Fund (NYSEARCA:EPI) is one such ETF that has been bucking the trend of lower prices and surging higher in recent weeks.  This country-specific fund targets over 150 stocks in India with adequate diversification across numerous sectors.  

While India has also suffered from declining prices in recent years, it appears to have gained some momentum and is breaking out of consolidation on the chart.  The fact that stocks in India were largely unaffected by the Ukraine crisis and have continued to prosper this year is a good sign of things to come in this region. 

Another area that has held up considerably well has been the iShares MSCI Taiwan ETF (NYSEARCA:EWT).  This fund is largely flat year-to-date, but has been quite resilient in the face of widespread stock declines across much of Asia.  EWT is heavily weighted in technology stocks, which have continued to prosper as suppliers for larger electronic manufacturers.  It was also one of the few emerging market indices to post positive returns in 2013. 

While investors should be cautious about the risks in emerging markets, there are opportunities for growth in select areas with more attractive valuations than many high-flying developed countries.  In addition, foreign diversification can enhance your long-term investing results by adding exposure to progressing nations. 

When this segment as a whole eventually regains its footing, I think we are going to see a massive upward lift in price and a shift in assets as investors rebalance their portfolios. Until that time, be selective and flexible with your exposure to take advantage of opportunities as they arise.

Read more from David Fabian, Managing Partner at FMD Capital Management:

3 Reasons Bulls Take On Too Much Risk

How to Maximize Your Income Portfolio Using A Four-Sleeve Approach

Dissecting the Struggling Dow This Year

Twitter: @fabiancapital
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