Emerging Markets Dip for 4th Successive Weak: ETFs in Focus

The MSCI emerging market index has plummeted 23% since reaching this year’s high on Jan 26. For the week ended Oct 18, it fell for the fourth successive week following the release of the Fed Minutes.  Federal Open Market Committee (FOMC) meeting was held on Sep 25-26. Fed has already hiked rates thrice this year and is on course for one more in December (see: all the Broad Emerging Market ETFs)

The fall in emerging markets (EM) has been caused by the strengthening of the U.S. dollar and rising U.S. interest rates. A rising greenback affects countries like Argentina and Turkey, which have large amounts of dollar denominated debt. 

As of Oct 18, Merval Stock Index in Argentina and South Africa’s FTSE/JSE Africa All Shares Index slid for the fourth week in a row, while Mexico’s peso suffered its worst week in five months. The strengthening dollar coupled with President Trump’s threat to shut the border if Mexico does not stop Central American migrants from reaching the United States led to the downtrend.

The past week saw the Shanghai Composite Index fell to its lowest level since 2014 with economic slowdown in China and worsening trade conflicts with the United States. Per JP Morgan, if the trade war escalates to a point where both Beijing and Washington end up imposing tariffs on all goods imported from each other, China’s GDP would reduce by 1%. President Trump hinted at imposing another round of tariffs saying that China’s interference in the country’s politics is a more punishable offence than Russian involvement in 2016 elections.

Higher oil prices have added to the woes of emerging nations like India and Turkey, which are heavily dependent on the import of oil. India’s rupee and the Turkish lira have depreciated nearly 15% and 49% respectively year to date.

The International Monetary Fund (IMF) has lowered the forecast for global growth to 3.7% for this and the next year, per the latest World Economic outlook. The forecast fell by 0.2 percentage points from the April report, which estimated global growth at the rate of 3.9% for these two years. Per IMF, the previous forecast was “overly optimistic” given the disruptive state of global trade policies. China’s growth forecast has fallen to 6.2% from the earlier estimated 6.4% for next year (read: 5 Defensive ETFs to Survive Global Market Rout).

There were notable revisions for the countries of Argentina, Brazil, Mexico, Iran and Turkey. “The negative revisions for emerging and developing economies are more severe,” said IMF.

This kind of persistent fall in the EMs have contributed to widespread loss in the related ETFs over the past month. Below we highlight the most popular ETFs (read: Winning ETF Strategies for the Fourth Quarter):

ETFs in Focus

Vanguard FTSE Emerging Markets ETF VWO

It tracks the FTSE Emerging Index. It comprises 4634 holdings. China (35.2%), Taiwan (15.2%) and India (11%) have double-digit exposure country wise. AUM is $54.1 billion and expense ratio is 0.14%. It has lost 7.8% over the past month.

iShares Core MSCI Emerging Markets ETF IEMG

It tracks the MSCI Emerging Markets Investable Market Index. There are 1903 holdings in the basket. The countries with double-digit exposure are China (27.9%), South Korea (15.1%) and Taiwan (12.6%). AUM is $45.6 billion and expense ratio is 0.14%. The fund has lost 8% over the past month.

iShares MSCI Emerging Markets ETF EEM

This fund tracks the MSCI Emerging Markets Index and comprises 977 holdings. China (29.9%), South Korea (14.5%) and Taiwan (11.8%) have double-digit exposures. AUM is $28.7 billion and expense ratio is 0.69%. It has lost 8.2% over the past month.

Schwab Emerging Markets Equity ETF SCHE

It tracks the FTSE All Emerging Index. There are 979 holdings in the basket. China (35.7%), Taiwan (12.8%) and India (11.3%) are countries with double-digit exposure each. AUM is $4.6 billion and expense ratio is 0.13%. It has lost 7.2% over the past month.

Schwab Fundamental Emerging Markets Large Company Index ETF FNDE

This fund tracks the Russell Fundamental Emerging Markets Large Company Index. There are 359 holdings in the basket. Countries with double-digit exposure are China (20.6%), South Korea (19.3%), Russia (14%) and Taiwan (12.5%). AUM is $2.1billion and expense ratio is 0.39%. The fund has lost 4.1% over the past month.

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VANGD-FTSE EM (VWO): ETF Research Reports
 
ISHARS-EMG MKT (EEM): ETF Research Reports
 
SCHWAB-EMG MKT (SCHE): ETF Research Reports
 
SCHWAB-F EM LCI (FNDE): ETF Research Reports
 
ISHARS-CR MS EM (IEMG): ETF Research Reports
 
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