30 Emerging Markets ETFs: Risk vs. Reward by Hao Jin, CFA
Returns from emerging markets stocks are highly correlated to those from U.S. stocks. Also, many people believed that those countries’ growth prospects were hardly a secret, and they had been more than priced into stocks. Still, from price/earnings to growth (PEG) ratio point of view (a ratio used to determine a stock's value while taking into account earnings growth, according to Investopedia), emerging countries’ PEG is still better than SPY’s.
From a total of 835 ETFs, I filtered out those ETFs with net assets less than $100 million and average volume less than 100,000. Below are 30 emerging market ETFs, along with their PEG and Price to Cash Flow (CF) ratio.
# Fund Name Ticker PEG Price/CF
1 iShares MSCI Emerging Markets Index EEM 0.9 6.5
2 Vanguard Emerging Markets Stock ETF VWO 0.7 4.5
3 iShares MSCI Pacific ex-Japan EPP 1.4 5.4
4 iShares S&P Latin America 40 Index ILF 1.1 9.4
5 iShares MSCI All Country Asia ex Jpn AAXJ 0.9 4.8
6 SPDR S&P Emerging Asia Pacific GMF 1.0 4.7
7 Claymore/BNY Mellon BRIC ETF EEB 0.5 4.5
8 iShares MSCI BRIC Index BKF 1.0 6.0
9 SPDR S&P BRIC 40 BIK 1.0 5.8
10 iShares MSCI Brazil Index EWZ 1.0 4.8
11 iShares MSCI Chile Investable Mkt Idx ECH 1.4 4.6
12 iShares FTSE/Xinhua China 25 Index FXI 1.0 6.3
13 PowerShares Gldn Dragon China PGJ 0.6 5.6
14 SPDR S&P China GXC 0.9 5.9
15 iShares MSCI Hong Kong Index EWH 0.8 6.3
16 iPath MSCI India Index ETN INP 1.0 6.5
17 WisdomTree India Earnings EPI 0.7 6.2
18 PowerShares India PIN 1.0 7.2
19 iShares MSCI Malaysia Index EWM 1.4 8.4
20 iShares MSCI Mexico Investable Mkt EWW 1.2 6.3
21 Market Vectors Russia ETF RSX 2.2 1.4
22 iShares MSCI South Korea Index EWY 0.9 4.0
23 iShares MSCI Singapore Index EWS 1.5 2.1
24 iShares MSCI South Africa Index EZA 0.9 5.9
25 iShares MSCI Taiwan Index EWT 1.6 4.0
26 iShares MSCI Turkey Invest Mkt Index TUR 0.5 0.9
27 UltraShort MSCI Emerging Mkts EEV
28 Direxion Daily Emrg Mkts Bull 3X EDC
29 Short MSCI Emerging Mkts ProShares EUM
30 UltraShort FTSE/Xinhua China25 FXP
Those ETFs can be divided into 4 categories: broad market index, regional/group, individual country and speculative.
Broad Market Index ETFs
Among these 4 categories, it is the safest way to play emerging market. #1 EEM and #2 VWO are the most populate emerging market ETFs. However, they are still more volatile than U.S market.
BLDRS Emerging Markets 50 ADR Index (ADRE) might be another choice, when you decide to swap for tax-loss purpose.
Regional ETFs
If you want to cherry pick certain regions in the world, you can pick from #3 - #9.
Country ETFs
#10-#26 are sorted by country. Most of non-intraday data, such as P/E, growth % and cash flow are updated quarterly. For example, iShares MSCI Turkey Invest Mkt Index (TUR) price has been up around 30% since June 30, 2009. That’s why it might be better to look at real-time data such as 52-week price range. Investors need a strong stomach to handle price swings for individual country ETFs, such as $18 - $51 for TUR within 52 weeks.
Speculative ETFs
#27-#30 are leveraged or short ETFs for you to express your strong feelings about emerging market, whether it is undervalued or overpriced. However, when you are using these weapons of mass destruction, you should be aware that leveraged ETFs had daily tracking objectives, and are not appropriate for long-term buy-and-hold investors. For example, the complaint against EEV, filed by U.S. firm Gilman and Pastor, notes that the fund was designed to track twice the inverse of the MSCI Emerging Markets Index. From Jan. 2, 2008 to Dec. 17, 2008, the MSCI Emerging Markets index fell by 52%, while EEV fell approximately 30%, according to TheStreet.com. In theory, EEV should be UP by 104%.
Conclusion
In Sep/Oct, there are lots of things for concern. Charles Ortel, managing director of Newport Value Partners has coined the term "skew-flation" to describe what's ahead: the "worst of all worlds" is coming, characterized by falling asset prices and higher taxes, accompanied by a rising cost of core goods and services. There's too much productive capacity around the world and not enough demand. At the same time, private sector incomes are down while debt levels are up.
Nonetheless, if you decide to participate in the market, and you slept well when MSCI Emerging Markets index fell over 50% last year, it doesn’t hurt to allocate a small portion of your portfolio to emerging markets, as long as you understand they are 30% more volatile than US market.
