Investors Turn To Emerging Market ETFs

emerging marketsRudy Martin: “Emerging market stocks are down.”

“China’s growth rate is dropping.”

“Investors have been fleeing emerging-market investments.”

When you see headlines like those for months on end, you run into a different risk — one that can cost you even-more money.

That’s because a bad-news overdose can make you give up at just the wrong time. Emerging markets are only the latest example.

In reality, no trend lasts forever. Stocks, funds and entire markets get overbought and oversold. Spotting reversals in worldwide investment trends is a huge part of my job. I look for evidence that a downward spiral is ready to rebound, or that a bullish uptrend is near exhaustion.

Identifying those trend reversals can lead directly to outsized portfolio gains — but sometimes you have to ignore the headlines.

The media usually reports the facts accurately, more or less. Emerging-market benchmarks have indeed been retreating for some time.

Earlier this month I wrote about some subtle clues that China is gaining economic momentum. Now some of those clues are in plain sight for more people to see.

In addition to growing domestic demand from China’s expanding affluent and middle classes, some export customers show signs of growth, too.

  • Germany seems to be doing fine …
  • The U.K. is getting it economy dialed in, while …
  • The rest of Europe is stabilizing after a rough few years.

Over here in the U.S., economic reports are starting to use words like “improving” and “moderate growth” instead of “lackluster” or “sluggish growth.”

Yes, the progress is slow — but it’s still progress.

As for China, industrial output grew 10.4% year-on-year in August, up from a 9.75% pace in July. Retail sales in August rose 13.4% from a year earlier, with the annualized pace accelerating from 13.2% the previous month.

The data confirms what I see elsewhere. Millions of Chinese consumers are in a spending mood.

In addition, fixed-asset investment (a great confidence indicator) rose 20.3% year-over-year in August, up from 20.1% in July. And Chinese Premier Li Keqiang said recently that the country’s economy is in a new growth phase. His tone was optimistic as he talked about stable and sustainable development.

Getting China back in gear will help other developing nations, too — especially those supplying ores, energy and other raw materials to the giant Asian manufacturing juggernaut.

Want More Evidence?

We have more than just circumstantial evidence. Emerging markets are responding to their adrenalin shot, as you can see in the table below.

Starting with all ETFs available to U.S. investors, I filtered out leveraged and inverse trading vehicles. Then I removed “small fry” ETFs with less than $20 million in net assets. Then I ranked the resulting 609 ETFs by their performance over the two-month period through Sept. 13 — last Friday.

Only 30 ETFs make the top 5%. Twelve of those 30 are in the “Emerging Market” category. Seven are pure China plays. The others include ETFs representing Egypt, South Korea, South Africa, Russia and a hybrid “Chindia” ETF split between China and India.

The Top 5% of Equity ETF Performers for the Past 3 Months

Included 12 Emerging Market Funds!

This group shows intriguing geographic diversity. Investors in the Market Vectors Egypt Index ETF (EGPT) look a lot more confident than the headlines lead you to think. I suspect they know things about the socially, economically and politically tumultuous nation that aren’t apparent on TV newscasts.

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