Emerging Markets ETFs – The Trend Is Not Your Friend

Emerging markets etfs were some of the worst performers for the year ending 2008. The economic backlash the United States suffered starting in March of 2007 had a trickledown effect on many foreign countries. However, many foreign countries were able to separate themselves from the struggles of the U.S. economy and investors began to plow money into hot emerging market funds throughout 2009.

The year 2010 saw investors put nearly $10 billion into the sector. China-centric funds became the most popular emerging market etf because of an impressive economic growth rate of 9%. India was next in line with an economic growth rate of nearly 7%. These figures caused many investors to bet heavily on Exchange Traded Funds that tracked the stock markets of both China and India. This emerging trend is expected to last well into 2011 and possibly beyond. The old adage, “let the trend be your friend” is why many investors are hedging their bets with an emerging markets etf, and especially BRIC funds, in an effort to create a well diversified portfolio. Now, there’s nothing wrong with being diversified, but this smacks of market timing to me. If you’re considering buying into emerging stock markets, ask yourself this question: are you interested merely because emerging market funds have been hot lately or are you truly interested in diversifying into emerging economies? For many people, I’d bet it’s the former.

It is obviously important to be very careful when investing in any emerging market etf. Finding the best emerging markets etf is crucial due to uneven growth rates amongst the emerging economies and the high transaction costs of investing in these markets. China and India may have seen strong economic growth that helped the sector rebound from 2008, but many other foreign economies struggle and will continue to struggle through today and beyond. The obvious economies are of course the poorest countries, such as Ghana, Zimbabwe and Haiti. However, not every foreign country is that easy to predict. For instance, Singapore saw their economy shrink in the first quarter of 2009 by 11.5%. By the end of 2010, the region made a full reversal and grew by nearly 14% according to Businessweek. This is but a small example of the type of volatility one can expect from investing in any type of emerging markets etfs.

In closing, it’s probably unwise to invest in individual country or sector funds – this being even more true in emerging markets than it is in developed ones. The simple reason is that though China, India, and Brazil may be growing rapidly right now, there’s no guarantee their economies won’t hit a severe roadblock in the near future. Since you can’t possibly know the winners in advance and since the risks involved are so high, the only prudent course of action is to own the entire emerging market space in one fund.