Emerging market ETFs have made a surprising comeback so far in 2017.
The funds invested in developing economies have easily outpaced US stocks this year. Two large US-listed ETFs – the iShares MSCI Emerging Markets ETF (EEM) and the iShares Core MSCI Emerging Markets ETF (IEMG), which have $30 billion in assets between them, are up around 17% since 1 January, compared to the SPDR S&P 500 ETF (SPY)’s 7.5% return over the same period.
TrackInsight data shows that while flows and returns have surged since the November election, volatility in the asset class has also slumped.
The move may have surprised analysts who bet on weak emerging markets performance following newly-elected US President Donald Trump’s more isolationist stance on trade and a strengthening US dollar versus other currencies.
But trade policy, or proposed policy, has not shaken markets as much as expected, and the US dollar has fallen more than 2% since the New Year, giving emerging markets a boost.
Another welcome relief for emerging markets has been stabilising commodity prices.
As a result, UBS analysts predict emerging markets will grow by 26% this year, compared to just 10% improvement in US corporations.
"The valuation of emerging markets is half the valuation of the S&P 500 when you look at things like price-to-sales, price-to-book and Dr Shiller's CAPE ratio," investor Jeffrey Gundlach told CNBC.
He added that he would even go short the S&P 500 for the time being versus emerging markets.
Single Country ETFs are Winners
For investors who want to go beyond choosing a diversified EM fund, they might consider one of the top performing single country ETFs.
The winner so far is India, which is home to four out of the 10 best performing emerging market stocks due to a pro-business prime minister and favourable demographics.
The other three top countries are Brazil, China and Poland.
The Brazilian economy is expected to rebound after its central bank has aggressively slashed interest rates. The VanEck Vectors Brazil Small-Cap ETF (BRF) and the iShares MSCI Brazil Small-Cap ETF (EWZS) gained about 34% each since 1 January.
China ETFs have produced mixed results – mainland shares have generally underperformed Hong Kong shares – but several funds have outperformed the MSCI broad index. The KraneShares CSI China Internet ETF (KWEB) has gained 35.5% this year.
Meanwhile, Poland has benefitted from improving economies in Europe and trade with Germany. In the US ETF landscape there are two options. The VanEck Vectors Poland ETF (PLND) and the iShares MSCI Poland Capped ETF (EPOL), with gains of more than 31%.