Emerging Market ETFs Own The First Quarter (VNM, EGPT, SCIF, SCIN)
Eric Dutram: The first quarter of 2012 was an excellent time to be in the stock market as the S&P 500 had its best start to the year in more than a decade. Quality data points along with an improved jobs outlook help to make many investors feel better about the economy, pushing the key benchmark to a 12% gain in the first 90 days of the year.
Yet while the U.S. market has been surging, the real winners were in the international space. Emerging markets have rebounded nicely after their severe slump in 2011 as risk appetite has increased across the board making investments in these volatile markets much more tolerable.
This trend has led to truly impressive gains to start 2012, greatly helping to erase some of the issues that many developing nations experienced to close out the previous year. In fact, all three of the best performing non-leveraged equity ETFs were emerging market funds including the only three that gained more than 30% in the time frame (read Top Three Emerging Market Consumer ETFs).
Below, we highlight these three all-star performers of the first quarter and some of the reasons for why these products have managed to outperform their peers by such a wide margin so far in 2012. While there is no telling if these impressive returns can continue, investors should definitely be aware of these outperforming ETFs heading into the second quarter of the year:
Market Vectors Vietnam ETF (NYSEARCA:VNM) – up 31.6% in Q1
2011 was an absolutely terrible year for investing in the Southeast Asian nation of Vietnam. VNM collapsed by nearly 47% in the time period, leading to huge losses for those that took a bet on the extremely risky space.
This was likely due to extremely high rates of inflation and growing concerns over the national currency, the dong. With declining consumer confidence and fears of a broad slowdown last year, many sold off Vietnamese assets and didn’t look back (see Inside The Vietnam ETF).
However, in 2012, growth is back on track in the country and inflation seems to have peaked. In fact, the central bank recently slashed rates for the first time since 2009, a move that could help to boost consumer demand across the country. Given this improved outlook in the country and in a variety of key export markets for Vietnam, VNM got back on track in a big way in 2012, adding more than 30% in the short time frame.
Another reason for the strength in VNM so far in 2012 could be due to the product’s top sectors; financials and energy. These two components combine to make up over 60% of the basket and given the improved inflation outlook and high oil prices, these segments have been among the best performers in across the board (read Is The Vietnam ETF Back On Track?).
Despite these strengths so far in 2012, investors shouldn’t have too short of a memory with this product, after all, it is still down 25% since inception. Furthermore, the product only has 30 holdings in its basket and charges investors 92 basis points a year in fees.
Nevertheless, VNM has been on quite the tear in 2012 and if the economy continues to improve in the country we could see further appreciation in the ETF, assuming that risk tolerance remains high in more developed markets.
Market Vectors Egypt Index ETF (NYSEARCA:EGPT)—up 33.9% in Q1
Unsurprisingly given the broad turmoil in the country, EGPT was also one of the worst performers in the ETF world in 2011. The country is still struggling with a variety of political issues after the departure of Mubarak and it doesn’t appear as though these problems are going to dissipate anytime soon. If anything, some analysts are worried that we could see further bloodshed in the area, especially if issues over power control remain uncertain.
Nevertheless, investors are beginning to warm up to the country thanks to its impressive long-term potential given the vast consumer market that could be developed in the nation. Additionally, there is some hope that the decent demand for longer term debt and the possibility of a peaceful transition could suggest that there is a good way out of the Egyptian mess, meaning that it could be the time to buy this beaten down nation (see Egypt ETF: Further To Fall?).
Thanks to this perception, EGPT has been an incredibly strong performer in 2012, gaining over 33% in the time period. Much like VNM, the heavy reliance on financials may have helped to boost the prospects of the fund while the relatively safe sector of telecom could have added some level of stability to the portfolio.
Also like its Vietnamese counterpart, the product only has about 30 securities in its basket while its expense ratio is rather high at 94 basis points a year. These problems could be relatively insignificant for many given that there are very few ways to play the Egyptian market besides this fund which has close to $50 million in AUM.
However, we are still quite concerned about the Egyptian economy in the near term. Some economists are worried about a possible devaluation of the currency, an event that could lead to huge losses in EGPT. In fact, a currency devaluation and subsequent inflation was one of the major reasons for VNM’s slump in years past.
Given that Egypt is a whole lot more volatile than Vietnam from a political perspective, EGPT could be a risky choice for most investors. Instead, the product should be thought of as a high risk, high reward play on emerging markets that could surge but is also likely to see significant volatility in the coming months as well (read Will The Egypt ETF Be Crushed By More Turmoil?).
Market Vectors India Small Cap Index ETF (NYSEARCA:SCIF) – up 39% in Q1
India has long been a favorite growth market for a number of investors across the world. That is because the country is approaching its ‘demographic dividend’ sweet-spot and could see huge growth as a result. However, this growth has been met with high rates of inflation as of late, a factor which has threatened to derail the economy and cause great harm to India’s millions of very poor citizens.
This issue certainly plagued the Indian economy throughout 2011, causing small cap products like SCIF to nearly collapse in the calendar year. In fact, SCIF lost more than half of its value in 2011, easily among the worst performances in the equity world during the period.
However, despite this slump—or possibly in part because of it—SCIF has roared higher so far this year on the back of improved fundamentals in the Indian economy. Interest rates have finally stopped climbing while growth rates look to be in the neighborhood of 7.6% for the current fiscal year. Given these trends, investors have decided to finally pile into India small caps creating an impressive bull run for the space.
In this year-to-date time frame, SCIF has added nearly 40% and was up as much as 55% in mid-February before pulling back later in the quarter. Unsurprisingly, this was good enough to put the fund into the top spot for the first quarter of 2012, edging out all other funds in the process.
(Investors should note that the product’s competitor from EG Shares—the INDXX India Small Cap Fund (NYSEARCA:SCIN)—was actually the fourth best performing ETF to start the year, adding 29.6% in the time period.)
Given the focus on inflation for India, the top sectors for SCIF could have helped push this fund to solid gains in the time period. Cyclical consumer stocks take the top spot while industrials and basic materials round out the top three. Additionally, the focus on small caps—just 4% of the fund is classified as mid cap or bigger—tends to create a bigger pop in bull markets, although the losses can be equally impressive during bearish runs (see India Small Cap ETFs Head-to-Head).
Despite these striking gains, the fund is still down almost 15% from a one year time period. Furthermore, the PE on the fund is below 10 even though there are some significant growth prospects for the Indian small cap sector.
For these reasons, as well as a number of other favorable valuation metrics on the fund, SCIF could have some more room to run. However, extreme volatility looks to be the norm in this product so just be careful if you are planning making a bet on this top performer for the rest of 2012.
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