By ETF Heat Map Team
Despite gold attracting a lot of investor’s attention in 2016 due to the great uncertainties that loom in the global economy, the emerging markets segment, which has also outperformed the stock market, might have arguably gone underappreciated. The Federal Reserve continues to maintain interest rates at historical lows with a possibility of a rate hike in the foreseeable future. During this uncertain time with an interest rate hike on the horizon, now is the time that investors should explore the opportunity enclosed in emerging market ETFs especially if they are over invested in gold and are seeking greater diversification.
The International Monetary Fund’s (IMF) latest growth projections foresee emerging market and developing economies to grow 4.1% in 2016 and 4.6% in 2017, and advanced economies to grow only 1.8% in both 2016 and 2017. Projected global output, as a percent change of GDP, will be 3.1% in 2016 and 3.4% in 2017.
The iShares MSCI Emerging Markets ETF, listed as EEM, recently hit a 52 week high of $38.315 per share after the Fed’s recent announcement to keep interest rates unchanged. The famous State Street Global Advisors SPDR S&P 500 ETF, with ticker SPY, has a year to date market return of 7.73%. Comparatively, the iShares MSCI Emerging Markets ETF, with ticker EEM, has shown a 14.37% year to date market return. The emerging markets EEM ETF has outperformed the U.S. SPY ETF by 6.64% so far this year alone.
In addition to the superb performance of the EEM ETF, other emerging market ETFs have also done quite well. Emerging market ETFs worth considering include:
- SCHE – Schwab Emerging Markets Equity ETF
- GMM – SPDR S&P Emerging Markets ETF
- IEMG – iShares Core MSCI Emerging Markets ETF
- DGS – WisdomTree Emerging Markets Small Cap Dividend Fund ETF
- EEM – iShares MSCI Emerging Markets ETF
As of September 28th, 2016, the emerging markets IEMG, EEM, GMM, SCHE, and DGS ETFs have shown a year to date market return of 13.79%, 14.37%, 14.76%, 15.68%, 19.66%, respectively. The superior performance can be attributed factors such as a weaker U.S. dollar, enforcement of a low interest rate policy by central banks, and an increased demand for riskier assets in hopes of obtaining higher returns.
Stabilization of the oil and commodity prices, a rebound in the currency markets, and continued ongoing worldwide monetary and fiscal easing policies would potentially help to drive emerging market equities higher in the months to come. The slow and gradual approach to interest rate hikes by the U.S. Federal Reserve might also favour emerging markets in the years to come as investors potentially expect one, two, three, and three gradual interest lift-offs in 2016, 2017, 2018, and 2019 respectively.
The GMM ETF tracks the S&P Emerging BMI Index and includes 1,282 securities in which a single security holds no more than 3.6 percent of the assets. Financial services make up 24.51% of all the stocks in the fund. Technology and consumer cyclical make up 19.68% and 11.84% of the fund, respectively. Chinese firms are represented the most in the fund’s portfolio, followed by companies from Taiwan and India.