Emerging Market ETFs To Soar In 2013? (EEM, VWO)
Eric Dutram: There is no doubt that the U.S. market started 2013 with a bang with heavy inflows across all kinds of risky assets. In fact, the S&P recorded eight sessions of gains, the longest streak of rally in the last eight years. Also the fact that investors are pouring in more cash in stocks, mutual funds and ETFs indicates the rise of investor confidence in the market.
However, keeping aside the growing economic momentum and rising consumer demand, U.S. stocks appear to be expensive when compared with their emerging market counterparts. Additionally, although the fiscal cliff overhang has been shed off, still the concerns over the sequester looms large over the economy.
In such a scenario investors have not completely been weaned away from the attractions of the emerging markets. In reality emerging market ETFs are known for their cheap valuation and better economic growth prospects than the developed economies. (Three Overlooked Emerging Market ETFs).
In recent months, the emerging markets have shown strong growth momentum at a time when the developed economies like the U.S. and Europe were handling their fiscal issues. Emerging market gained 5% in December last year.
Growth in the emerging markets is expected to rise in 2013 as well. Among these markets, China appears to be attracting investor attention once again as it is back on the growth path after years of underperformance.
Numbers now suggest that China seems to be outperforming both the U.S. and overall emerging market as a whole. Stocks in the country actually posted growth of 25% in the past six months.
In addition, India appears to be back on track attributable to various government reforms. The Indian economy is largely dependent on foreign capital inflow. And with the allowance of foreign direct investments in the retail industry, the market is surely poised to benefit going forward.
Healthy corporate earnings and an increase in business spending will also boost the performance of the Indian equities and the economy. The growth will be further spurred by the reinstallation and improvement in the infrastructure of the country (Can India ETFs Continue Their Solid Run?).
Also, valuations for emerging market stocks appear to be cheaper compared to U.S. stocks. After the recent rally, U.S. stocks appear to be trading at a premium of 40% on the basis of price-to book ratio.
So, considering the strong growth momentum in the emerging economies and a more attractive valuation of stocks, it seems that emerging market ETFs are poised for strong growth heading into 2013. In fact emerging market ETFs have experienced a heavy inflow of assets from the start of the year.
In 2013 emerging markets ETFs have recorded an inflow of nearly $6.8 billion. Of this, approximately $5 billion was poured into the two largest emerging market ETFs, namely, iShares MSCI Emerging Markets and Vanguard FTSE Emerging Markets (Emerging Market ETFs: EEM vs. VWO). Both the ETFs have been briefly described below:
iShares MSCI Emerging Markets ETF (NYSEARCA:EEM)
One of the popular ways to track the emerging market is through EEM which follows the MSCI Emerging Market Index. The fund appears to be rich in both volume and assets under management.
EEM manages an asset base of $51.9 billion and trades with volume of more than 56 million. The fund’s asset base is spread across a large basket of 843 securities and has a minimal company specific risk as just 16.08% is invested in top ten holdings.
Among individual holdings, Samsung Electronics, Taiwan semiconductor and China Mobile forms the top line of the fund. The fund charges an expense ratio of 66 basis points annually.
In terms of individual countries, China enjoys the maximum allocation with a share of 18.04% while South Korea, Brazil and Taiwan also gets double digit allocation in the fund with a share of 14.38%, 12.74% and 10.38% (China ETF Investing 101).
Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO)
VWO is another popular ETF to track emerging market. The fund manages an asset base of $61,625 million and trades at volume level of more than 22 million shares a day.
The fund invests its asset base in 888 securities with just 14.05% invested in top ten holdings. Among individual holdings, Samsung, China Mobile and America Movil occupies the top three positions with respective share of 2.51%, 1.86% and 1.39%.
For sectors, financial gets the maximum allocation closely followed by technology, basic materials and energy sectors.
Among various nations, China, South Korea and Brazil and Taiwan enjoy double digit allocation in the fund with respective share of 17.9%, 14.46%, 12.02% and 10.88%. The fund charges a fee of 20 basis points annually.