Six ETFs beating the BRICs – and the global market

We regularly compare the nations of China, Brazil, South Korea, Taiwan, South Africa, Russia, India, Mexico, Malaysia and Indonesia against the broader Vanguard Emerging Markets ETF (VWOquote) to see where momentum is picking up and where it lags. The following is an assessment of six country ETFs that are showing strong outperformance potential relative to broader emerging markets.

This is done by showing the trend in the country’s price ratio relative to the broader Emerging Markets ETF. A rising price ratio means the numerator/country is outperforming (up more/down less) the denominator/VWO.

The Emerging Leaders Report is exclusive to Emerging Money. 

South Korea (EWY, quote) is barely ahead of the global market, up close to 14% year to date versus VWO’s 13.5% increase. High-tech heavyweights like Samsung — 21% of the entire portfolio — have given Seoul its upward momentum. Note that EWY has really started outperforming VWO in just the last three weeks, and that we are still rebuilding from the profound sell-off we saw in South Korea in particular back in the August correction.

Taiwan (EWT, quote) is also benefiting from its high-tech sector balance, given the number of world-class chip makers and other computer component stocks we have here. The trend for EWT has been more subtle than what we saw in EWY, but it has also been running a lot longer so far — since February or even December, depending on where you start to draw the line.

 

Interestingly, South Africa (EZA, quote) is more or less in line with VWO’s broad sector weighting, with two major exceptions. First, the South Africa fund gives up much of VWO’s 14% weighting to energy to make room for the country’s mining industry. A full 22% of EZA is invested in materials stocks compared to 12% of VWO. Second, EZA is 13% weighted to telecom, largely thanks to the presence of global carrier MTN  (MTNOYquote) in the portfolio.

 

Mexico (EWW, quote) is also extremely telecom-rich due to America Movil’s (AMXquote) Mexican origins. The company accounts for virtually the entire 21.91% allocation that EWW makes to telecom. Consumer stocks like Walmart Mexico, media companies and the beverage group are also extremely well-represented in EWW. Energy stocks, on the other hand, are nonexistent in terms of appreciable weighting here.

Malaysia (EWM, quote) is a hard nut for most U.S. investors to crack, with few truly liquid Malaysian stocks trading on Wall Street. Still, money started flowing into this fund relatively recently, with the upward trend only now starting to emerge. Banks and industrial conglomerates dominate with a staggering 46% weighting in the fund, but energy and other commodities are unusually light at barely 7% of the total fund.

 

Indonesia (IDX, quote) has been on a real bull run and has been broadly outperforming its emerging market peers since 2009. While its trend cooled appreciably in the first few months of this year, it now has momentum back on its side. 

Where are the BRICs?

You will notice immediately that the BRICs — Brazil, Russia, India and China — are all missing from this week’s report.

All four of these markets have started underperforming the global benchmark and appear to be in the midst of a potential correction.

Given the heavy weighting BRICs have in most emerging market ETFs, near-term sentiment towards emerging economies may continue to sour until a reversal occurs.

However, not all funds were created equal. VWO has a hefty 46.9% of its assets in the BRIC compared to a slightly lighter 45.2% weighting in its rival from iShares, the MSCI fund EEM (quote).

Whether EEM’s relative underweight on the BRIC translates into better performance ahead remains to be seen. At the moment, VWO is still coasting on previous returns, up 20 basis points over EEM year to date.

by Michael A. Gayed CFA for Emerging Money

The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing. The commentary does not constitute individualized advice. The opinions herein are not personalized recommendations to buy, sell or hold securities.