Signs of Hope For Emerging Market ETFs

new etfsAfter growth slowdown, capital flight and choppy trading in the past few months, the trend has finally started to reverse for emerging markets. Many emerging market stocks have rebounded from their recent lows and are moving higher.

The slew of positive news, particularly the latest Chinese data has spurred investors’ confidence in these markets (read: India ETFs Rebound on Central Bank Steps).

Signs of Hope?

Investors are turning bullish on emerging markets thanks to strong trade data for August from China.

Exports rose more than expected to 7.2% in August when compared to the year-ago time frame, boosted by strong demand from the U.S. and other major export markets. This is up from the 5.1% increase in July and 3.1% decline in June. Meanwhile, imports lagged expectation with a gain of 7% but were down from 10.9% in July. This led to widening of trade surplus to $28.6 billion from $17.82 billion in June.

Further, inflation in China came in at 2.6% for August, in-line with the market expectation and just a percentage point above the July level. The inflation has remained below the government target for eight consecutive months.

These numbers are especially encouraging as they suggest that the slowdown in China seen in nine of the past 10 quarters might finally be over.

Apart from China, the worst hit economies – India, Indonesia and Brazil – are lately showing some signs of hope, driving emerging markets higher. According to the data released by HSBC and Markit Economics, emerging markets manufacturing activity rose slightly in August, marking the first rise since March.

Market Impact

The upbeat Chinese data unsurprisingly led to bullish trading conditions in the emerging markets ETFs pushing major funds higher. The two ultra-popular funds targeting broad emerging nations – (VWO) and (EEM) – were up nearly 3% yesterday compared to gains of roughly 1% for the broad U.S. market (SPY) and about 1.37% for the total world (VT).

Someother ETFs tracking emerging markets, saw more strength than the two popular funds and led the way higher. Below, we highlight three such ETFs that have enjoyed huge rally from this trend, and could be worth consideration, if China continues to rebound:

MSCI Emerging Markets Consumer Discretionary Sector ETF (EMDI)

This fund provides exposure to the consumer discretionary sector of broad emerging markets by tracking the MSCI Emerging Markets Consumer Discretionary Index. The fund has been able to gather only $2.6 million in AUM so far and average daily volume is also light with just 4,000 shares. Further, the ETF is a bit expensive, charging 68 bps in fees per year.

With holdings of 91 securities, the product is somewhat concentrated on its top 10 holdings with nearly 49% of total assets. The fund is heavily exposed to South Korean firms making up for 33.48% share followed by South Africa (18.13%). Other countries such as China, Brazil, Taiwan, Mexico, Malaysia, India, Indonesia and Hong Kong make up a nice mix in the fund’s portfolio.

The ETF added about 5.11% after the China data came out, though the product was down about 2.72% in the year-to-date time frame.

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