Per Bloomberg report, U.S.-listed ETFs that track developing countries, along with targeted country-specific ETFs, attracted $1.28 billion for the week ended Nov 23, marking the sixth consecutive week of inflows. This brings total inflows of around $20.5 billion for the year. The renewed optimism came on the heels of a soft view from the Fed, hopes of a trade truce between the United States and China at the G-20 meeting and expectations of a weaker dollar in 2019.
Fed officials hinted toward easing of the multiple interest rate hikes next year as the global economy is slowing down. According to a recent Reuters poll, a significant majority of economists surveyed over the past week say the Fed will slow the pace next year. Meanwhile, a new CNBC Global CFO Council survey found that 45.9% expect two rate hikes in 2019, while 40.5% expect three. Since the last Fed meeting in November, the federal fund futures market shows market’s expectation of two or more rate hikes in 2019 dropping to around 37% from 67%, meaning those futures now forecast one to two rate increases next year.
That said, Morgan Stanley upgraded emerging market stocks to overweight from underweight with the top countries including Brazil, Thailand, Indonesia, India, Peru and Poland.
Additionally, emerging market valuations look extremely cheap, indicating a long-term buying opportunity. According to a report from Yardeni Research, stocks in the MSCI Emerging Markets Index are currently trading at 10.4 times estimated earnings for the next 12 months. This is much below 15.6 times estimated earnings for the next 12 months for the American equities and 12.7 times the EAFE. Notably, the MSCI Emerging Markets Index, which measures stocks in 24 economies, has fallen around 16% so far this year (read: Time to Buy the Beaten-Down Emerging Market ETFs?).
ETFs to Consider
Given the encouraging fundamentals, investors seeking to make profits in this space could play with emerging market ETFs. While there are several options in the space, we have highlighted five funds that have been enjoying huge capital inflows this month.
iShares Core MSCI Emerging Markets ETF IEMG
IEMG is among the most popular ETF plays this month, pulling in about $2.2 billion in capital. It offers exposure to a broad range of 1878 emerging market securities with each accounting for less than 4% of the assets. China takes the largest share at 28.6% while South Korea and Taiwan also receive double-digit exposure each. From a sector look, about one-fourth of the portfolio is tilted toward financials while information technology, communications and consumer discretionary round off the next three spots. The ETF has AUM of $47.6 billion and average daily volume of about 14.9 million shares. It charges 14 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Vanguard FTSE Emerging Markets ETF VWO
This fund has gathered $424 million in capital, bringing its total AUM to $55 billion. It holds 4644 stocks in its basket with none making up for more than 4.1% share. Chinese firms account for 32% of the portfolio while Taiwan and India take 14% and 11% share, respectively. Here also, financials is the top sector at 25% followed by communications (13%), technology (10%), consumer discretionary (10%). The product charges 14 bps in annual fees and trades in heavy volume of 15.5 million shares. It has a Zacks ETF Rank #3 with a Medium risk outlook.
SPDR Portfolio Emerging Markets ETF SPEM
With AUM of $1.7 billion, this product follows the S&P Emerging BMI Index and charges 11 bps in annual fees. Holding 1388 stocks in its basket, it is pretty spread out across components with none making up for more than 4.3% share. From a country look, China takes the largest share at 31.7% while India and Taiwan round off the next two spots. Financials, information technology, and consumer discretionary are the top three sectors. SPEM saw inflows of $221 million this month and trades in average daily volume of 601,000 shares. It has a Zacks ETF Rank #3 (read: Emerging Market Currencies Falling: These ETFs Are Still Hot).
iShares MSCI Emerging Markets ETF EEM
This product tracks the MSCI Emerging Markets Index, holding 979 stocks in its basket with each accounting for no more than 4.41% of the assets. China, South Korea and Taiwan are the top three countries while financials, information technology, and communication constitute the top three sectors. EEM has accumulated more than $91 million in capital this month. It is the most-popular and widely traded emerging market ETF with AUM of $28.7 billion and average daily volume of more than 75.6 million shares. The fund charges 69 bps in fees per year from investors and has a Zacks ETF Rank #3 with a Medium risk outlook.
WisdomTree Emerging Markets High Dividend Fund DEM
This fund has gathered more than $90 million in its asset base, propelling its AUM to $1.9 billion. It offers exposure to the high-dividend-yielding companies in the emerging markets region by tracking the WisdomTree Emerging Markets Equity Income Index. DEM holds 493 stocks with each making up for no more than 3% share. Here, Taiwan, China and Russia are the top three countries with 25.3%, 21.8% and 15.7% share, respectively while financials, energy and materials make up the top three sectors with double-digit exposure each. The product has expense ratio of 0.63% and sees volume of 280,000 shares a day on average. It has a Zacks ETF Rank #3 with a Medium risk outlook (read: Should You Dig Into the Undervaluation of EM ETFs?)
The iShares MSCI Emerging Markets ETF (EEM) was trading at $40.24 per share on Tuesday afternoon, up $0.01 (+0.02%). Year-to-date, EEM has declined -14.60%, versus a 0.38% rise in the benchmark S&P 500 index during the same period.
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