Is It Time to Exit Emerging ETFs?

Brittney Barrett  |

The trend for relying on emerging markets in the midst of a domestic slump is more flawed than many have realized. While emerging market ETFs had been thriving prior to the realization that global and U.S.growth is slowing, that momentum will struggle sustain itself in the aftermath. Producing nations that have been coming into their own in recent years rely on the U.S. and other first world nations to buy their goods. A decline in consumer confidence in these more mature nations will be detrimental to the cause.

China will continue to grow alongside India and Southeast Asia, but the rate of improvement may no longer be speedy enough to buoy the ills of established nations. Emerging markets have already expanded tremendously. An increasingly global economy, the result of the internet and new methods of trading that facilitate an increasingly speedy process of economic expansion, is a double edged sword.  While on one end, this creates huge booms that investors are able to profit from in a short period of time, it also means that more and more ills of one nation are connected to others.

This will have a negative impact on emerging market ETFs which have taken a hit since their highs earlier in the year. Investing in exchange traded funds that tracked the economy of an emerging nation or a basket of emerging countries once could be considering diversifying a portfolio but that seems the case less and less.

Today, the fast rise of emerging markets has led to the difficult task of balancing mounting risk from the Eurozone and U.S. alongside the possibility of a decline in the demand.

Just last week, the head of the World Bank, Robert Zoellick stressed as much, warning that continued squabble and protectionist measures in term of investment would slide demand for emerging nations and cause them to lose their potential as drivers of an economic recovery.

Zoellick stressed that the emerging nations no longer have the potential for an ongoing meteoric rise if the U.S. and Eurozone are unable to sort out their own problems. The squabbling in mature nations has already led to a slump in stocks in developing nations, as demand from the former international powerhouses peters out on worry. The iShares FTSE China 25 ETF (FXI) declined 1.2 percent during Monday trading while the iShares MSCI Brazil ETF (EWZ) slumped by 0.7 percent as concern regarding the future health of the funds incites worry in investors.  Longer term, the iShares MSCI Brazil ETF is down more than 14 percent since  July while the iShares FTSE China 25 ETF (FXI) has plummeted 15 percent. Some singular emerging-market stocks have not performed any more impressively Petroleo Brasileiro (PBR) and Aluminum Corporation of China (ACH) have both been unraveling since July highs as American fears demand for the products will weaken alongside global demand.

As of now, the data indicates economic growth and emerging market funds look cheap compared to previous levels but in economies such as China and Brazil, the threat remains that these levels can only be maintained until new figures on growth are released. There is still considerable possibility in emerging economies, but their appeal, alongside their role as an engine of the global economy is now being called into question. Should the data regarding growth indicate slowing more dramatically than anticipated, investors who have been relying on the nations as an escape from the domestic slump may be dissapointed to see how closely the two are connected.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:

Market Movers

Sponsored Financial Content