Emerging markets once again took a toll from the global sell-off in late July and early August due to escalating geopolitical tensions in Ukraine and the Middle East. The political impasse due to the Russian annexation of Crimea weighed heavily on global economic growth.
Tensions escalated over the weekend when reports said that Ukrainian forces had destroyed most of the Russian armored vehicles seen crossing the Ukraine border while Russia denied any incursion of fighters and vehicles across the border. The news came amid a Russian humanitarian aid mission to the war-torn cities in eastern Ukraine under the Red Cross, in an attempt to stop the conflict in Ukraine and restore peace.
The Russian invasion, if confirmed, would mark a new stage in the six-month clash and lead to a first direct military conflict between the two adversaries since the crisis began in spring. Moreover, the embittered relationship between Russia and the western world has already added to the economic woes.
This is because Russia has imposed a tit-for-tat ban on food imports from the Western countries in retaliation to sanctions imposed on it over invading Ukraine. However, the tension eased last week when Russia ended the military exercises near the Ukrainian border and withdrew troops, suggesting that further sanctions might come to an end.
Further, some positive developments in other key emerging markets supported the rally in the stocks. South Korea reduced its benchmark interest rate for the first time in 15 months by 25 bps to 2.25% while weak Chinese data raised speculation that the central bank will expand its stimulus program to boost growth in the country.
Moreover, emerging markets are expected to grow stronger than the developed countries like the U.S. and Japan. As per the International Monetary Fund (IMF), emerging markets are expected to grow 4.6% this year, well above the expected growth of 1.7% for the U.S. and 1.6% for Japan.
To make the case stronger, emerging stocks appear cheaper at current levels when compared to the stocks of the developed world. Low valuations along with a slew of positive developments are injecting fresh optimism into the emerging market stocks despite the turmoil in Ukraine. While several emerging market ETFs have performed remarkably well, the following three ETFs emerged as true winners and surged to new 52-week highs last week.
SPDR S&P BIRC 40 (NYSE:BIK)
This fund provides exposure to the equities of Brazil, Russia, India and China by tracking the S&P BRIC 40 Index. It holds 45 securities in its basket and is concentrated in the top 10 holdings at 52.5%. In addition, the product is tilted toward the financial sector accounting for more than one-third share while energy makes up for another one-fourth share.
China dominates the fund return at 56%, followed by Russia (18.34%), Brazil (18.03%) and India (7.60%). The ETF has amassed $181.9 million while it charges 50 bps in fees. It trades in moderate volume of more than 70,000 shares a day and hit a 52-week high of $25.25 per share on August 15, representing a gain of about 5.6% so far in the second half of the year. BIK currently has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook.
FirstTrust EM Small Cap AlphaDEX (NYSE:FEMS)
This fund surged to a new one-year high of $39.08 on August 13, representing nearly 5.4% gain since the start of the second half. The ETF follows the Defined Emerging Markets Small Cap Index and targets the small cap segment of the emerging market space. Holding 204 securities, the fund is well spread out across each component as none of the security holds more than 1.35%. Chinese firms take the top spot at nearly 30%, closely followed by Taiwan at 22.4%.
From a sector look, about one-fourth of the portfolio is allocated to information technology while financials, industrials, consumer discretionary and materials round off the top five with double-digit allocation each. The product is often overlooked by investors, as depicted by AUM of $76.6 million and average daily volume of roughly 46,000 shares. The expense ratio came in higher at 0.80%.
iShares MSCI EM Min Volatility (NYSE:EEMV)
The ETF provides exposure to 239 emerging market stocks having lower volatility characteristics relative to the broader emerging equity market. It follows the MSCI Emerging Markets Minimum Volatility Index and is one of the largest and popular ETFs in the emerging space with AUM of over $2 billion and average daily volume of around 241,000 shares. The ETF charges 25 bps in annual fees and expenses.
The fund is widely spread across a number of securities as none of these holds more than 1.55% of assets. Additionally, the product provides diverse exposure to a number of emerging countries with China, Taiwan and South Korea as the top three holdings. However, the fund has a slight tilt towards financials with 26.9% share, while consumer staples, information technology and telecommunication services round off to the next three spots (read: 3 Safe Haven ETFs to Beat a Summer Slowdown).
EEMV hit a one-year high of $62.50 per share on August 15, and the fund has moved higher by about 4% quarter-to-date. It has a Zacks ETF Rank of 3 with a Medium risk outlook.
Bottom Line
The above-mentioned products could be worthwhile in the current market turmoil and are clearly outperforming the broad emerging, developed and global world so far in the second half of the year. This is especially true as the ultra-popular Vanguard FTSE Emerging Markets (ARCA:VWO) has gained nearly 3.4% in the same time period while iShares MSCI Eafe Index Fund (ARCA:EFA) and Vanguard Total World Stock Index (NYSE:VT) lost 3.3% and 1.1%, respectively.
This suggests strong growth and optimism in these countries moving ahead into the year.