Emerging market ETFs show pockets of outperformance

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Emerging market exchange-traded funds have diverged sharply this year, with vehicles focused on major commodity exporters weathering the storm that has hit the broader asset class.

The war in Ukraine, the soaring US dollar and the chaos in Sri Lanka have dealt a heavy blow to developing economies in 2022. But some countries have avoided the broader crisis as they benefit from the broader trends shaping global markets this year.

“The strong dollar tends to be negative for emerging markets, but with more than 20 countries to choose from, there will always be relative winners,” said Charlie Robertson, chief global economist at Renaissance Capital, an investment bank. investment specializing in emerging markets.

Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, agreed, pointing out that despite falling local currencies, a handful of ETFs have posted positive returns this year.

“ETFs from Brazil, Nigeria, Chile and Saudi Arabia lead this group. The petrochemical economies in this group have clearly benefited from the surge in energy prices,” he said, adding that the largest ETF tracking indices focused on these countries had almost no exposure to the stocks of the information technology. It also “played heavily in their favor as the tech bubble deflated,” Lamont said.

One of the best performing non-leveraged emerging markets ETFs this year, according to TrackInsight, was the iShares MSCI Chile (ECH) ETF.

It generated returns of nearly 14% in the year to July 21, according to data from VettaFi. In contrast, the SPDR S&P 500 ETF Trust (SPY) – which tracks large US companies – fell more than 15% over the same period.

“Chile is home to the world’s largest lithium producer, which has been a standout driver of this ETF’s performance this year,” Lamont said. ECH has a nearly 24% weighting in Sociedad Quimica y Minera de Chile, which has risen more than 80% since the start of the year.

Other emerging-market ETFs with heavy exposure to China or Taiwan fared less well because the funds tended to be tech-heavy, said Todd Rosenbluth, head of research at VettaFi.

To illustrate his point, EMQQ, Emerging Markets Internet and Ecommerce ETF, which rose to prominence after posting returns of over 80% in 2020, fell nearly 25% in the year to 21 July. The fund had a 51.6% weighting in China on July 22.

“Although emerging markets are grouped together, they are not all aligned,” Rosenbluth said, adding that this is why a broad emerging markets ETF is often preferred by investors so that it can dilute the country-specific risk through diversification.

This year, however, that strategy did not bear fruit. Data from TrackInsight shows that emerging market ETFs are down around 17% on average.

“The EM label serves to obscure what is really [a] motley crew from very different markets,” Lamont said.

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