Emerging Market ETFs Show Unexpected Strength
The real test for EEM is whether or not it will be able to push back above its 2013 high and extend these recent gains above the $44 level. If it fails to do so, many critics will point to out that these stocks likely just experienced an oversold bounce in the midst of another lackluster year.
The long-term opportunity for emerging markets right now is the combination of negative sentiment and underweight exposure that most investors have to these countries. If we do start to see additional momentum take hold, the effects of rebalancing and performance chasing by institutional and retail investors will likely provide a strong lift to these stocks for quite some time. Severely oversold regions such as the iShares MSCI Brazil ETF (EWZ) and MarketVectors Russia ETF (RSX) have a long way to go to make-up ground on their emerging market peers.
Right now, I do not have an allocation to emerging market equities and instead have been focused on fixed-income opportunities in these countries. However, I am closely watching and considering adding to a tactical holding such as the SPDR S&P Emerging Markets Small Cap ETF (EWX) when the opportunity presents itself. Emerging market small-cap stocks have held up better over the last several years than large-cap equities. In addition, the top three country holdings in EWX are Taiwan, China and India, which have performed better than their peer group.
In my opinion, emerging markets should be back on your watch list and included in strategizing your portfolio game plan. While they may still be susceptible to periods of volatility, they may end up surprising us with additional upside in the coming months as long as the global economy holds up.
In addition, shifting equity flows may enhance market leadership as dynamics change. To guard against a reversal of fortune and define your risk, consider using a stop loss or other sell discipline as a precautionary measure.