Emerging Markets Emerging Further

Veteran investors know that markets tend to move in cyclical fashion. What was once in favor eventually falls from grace and languishes until buying interest is once again renewed. 

And so it is for emerging market funds. Our weekly scan for bullish ETFs has led us to a treasure trove of emerging market equity portfolios aiming to recover some lost ground. Over a dozen broad-based funds are rebounding off double bottoms formed in the last quarter of 2018. Some, like the JPMorgan Diversified Return Emerging Markets ETF (NYSE Arca: JPEM), are fairly vanilla. Others, such as the USAA MSCI Emerging Markets Value Momentum Blend ETF (NYSE Arca: UEVM), have decided factor tilts while some portfolios, like the First Trust Emerging Markets Small Cap AlphaDEX Fund (Nasdaq: FEMS), focus their sights solely on lower-capitalized issues.

Allocating to emerging markets was a harrowing experience over the past year, to say the least.

Investors engaged in wholesale selling as the Federal Reserve cranked up interest rates and bolstered the dollar. A trade war between the U.S. and China, too, threatened to boil over, putting pressure on Chinese shares, a significant component of most emerging market portfolios. Fund drawdowns averaged 19 percent in 2018 overall and 26 percent for the small-cap portfolios.

In the midst of the emerging market meltdown, though, two funds stood out for their relative stability. Now, as the Fed’s rate hike momentum slows and the prospect of an accord with China brightens, the “win by losing less” stratagem followed by this pair may pay off yet again.

The Invesco S&P Emerging Markets Low Volatility ETF (NYSE Arca: EELV), a portfolio comprised of the 200 least volatile stocks in the S&P Emerging BMI Plus LargeMid Cap Index, offers a lower-beta play on emerging markets. Weighted 72 percent in large-caps and 27 percent in mid-caps, EELV's portfolio typifies a low-vol approach. From a sector standpoint, financial services stocks take up 36 percent of the portfolio’s heft and consumer staples contribute 12 percent. All other sector exposures each amount to less than 10 percent.

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Disclosure: None.

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