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3 Emerging Market Countries That Are Breaking Out

Stocks in this article: EEM VWO SPY EWT EWM IDX

NEW YORK ( TheStreet) -- Emerging market countries have been a hot commodity for years, as investors have poured billions of dollars into these economies as a way of diversifying their portfolio. These up-and-coming economies offer many attractive qualities over developed markets, which can include: Lower debt burdens, solid economic prospects, high levels of natural resources and a burgeoning workforce.

Two of the largest exchange-traded funds in this space are the iShares MSCI Emerging Markets ETF (EEM) and the Vanguard FTSE Emerging Market ETF (VWO). Both of these funds invest in a diversified basket of large- and mid-cap companies in several emerging-market countries.

Below are the weightings for each of the top 10 countries in their respective ETF.

Emerging markets peaked at the end of 2012 and have been on a slow descent ever since. Despite the double-digit returns of the SPDR S&P 500 (SPY) this year, emerging markets have not risen at the same pace as the U.S. I believe that this is largely due to the trend of investors shunning risk assets in favor of more stalwart, defensive and dividend-oriented stocks.

We have seen a tremendous amount of money flow into low-volatility stocks and bonds over the last 12 months, which has pushed those asset prices to new all-time highs. The comparison of EEM vs. SPY in the chart below shows the distinct difference in total return since the beginning of the year.

Some of the largest emerging market countries that have been experiencing a slowdown in their growth include: China, South Korea, Brazil, South Africa and Russia. Each of these economies is largely dependent on global commodity cycles, which have worked against them so far this year.

We have been witnessing a persistent deflationary downtrend in the Reuters/Jefferies CRB Commodity Index since it peaked in late 2012. While I am not yet ready to declare the commodity super cycle dead, this will be a nagging factor that works against many of the larger EM economies that depend on natural resources for their survival.

However, there is still a case to be made for smaller emerging market countries that are bucking this downtrend and continuing to add value to investors' portfolios. Of the top 10 countries in the emerging markets group, three of them are positive on the year and in a steady uptrend. These ETFs, and their 2013 performance through May 14, include:

iShares MSCI Taiwan ETF (EWT) +3.23%
iShares MSCI Malaysia ETF (EWM) +11.04%
MarketVectors Indonesia Index ETF (IDX) +14.00%

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