Bright spots in emerging market ETFs despite strong US dollar

Not all emerging markets offer the same opportunities for investors

Heather Bell


With inflation running rampant, interest rates cranking steadily higher, markets in turmoil and two quarters of GDP contraction, the US is not looking like the best investment opportunity for many investors. And most other developed markets have done even worse in the past 12 months.  

While emerging and frontier markets’ performance have been uneven, there are some bright spots over the past year that merit tactical investors’ attention.  

The emerging market equities have been seen as a source of diversification, though they have generally trailed the US, with the exception of China. But China is being hit hard by its stringent domestic coronavirus policies, which have brought some industries to a standstill.

With the country representing about 30% or more of cap-weighted emerging market indices, it is not a stretch to say China is a drag on emerging markets lately.

However, there have been a number of ETFs that have outperformed the US market over the past year as well as in 2022. 

Oil boosts Middle East

With Russian oil banned from many markets due to sanctions over Moscow’s war in Ukraine, other oil-producing countries have reaped the benefits of constrained supply. The iShares MSCI Saudi Arabia Capped UCITS ETF (IKSA), iShares MSCI Qatar ETF (QAT) and iShares MSCI UAE ETF (UAE) have all outperformed the iShares Core S&P 500 UCITS ETF (CSPX) by a wide margin over the past 12 months, no doubt boosted by their oil sales.

On a 12-month and year-to-date basis, as at July 27, the three Middle Eastern country funds blew past the US market. While the S&P 500 fell 6.3% during the 12-month period, IKSA, QAT and UAE posted returns ranging between 12% and nearly 23%.

Meanwhile, the S&P 500 has declined 14% so far this year, even as the three non-US ETFs gained between 3% and 12%. Over both time periods, Qatar was the best performer among the Middle Eastern countries.

The question is whether the outperformance will continue given recent moderation in oil prices. 

Standouts in Asia

Although China has been hit hard during the pandemic, other emerging markets in the Asia Pacific region are exhibiting strong performance relative to the US. 

The HSBC MSCI Indonesia UCITS ETF (HIDR) has shown a particularly strong performance, with a 12-month return of 17.2% and a year-to-date return of 1.72% compared with CSPX’s performance of -6.3% and -14%, respectively.

The iShares MSCI India UCITS ETF (NDIA) and the Xtrackers MSCI Malaysia UCITS ETF (XCS3) both trailed Indonesia over the 12-month and year-to-date periods, however, still outperformed the S&P 500. NDIA was up 0.6% over the 12-month period, while XCS3 was down 4.6%. Both are down more than 8% this year. 

Latin America’s standouts

Latin America is another region that has seen strong performance from select countries relative to the US.

The iShares MSCI Chile ETF (ECH) has been a particular standout, notching a year-to-date return of 17.1% and a 5.5% return for the one-year period. 

The rest of the funds considered are down for the year and one-year periods but have still done better than the US. The iShares MSCI Mexico Capped UCITS ETF (CMXC) and the Global X MSCI Colombia ETF (GXG) were down 6.4% and 11.1%, respectively, versus -14% for the S&P 500. 

Over the one-year period, when the S&P 500 was down 6.3%, CMXC declined 2.6% while GXG fell 5.4%.

Emerging markets have been traditionally touted as ways to diversify investors’ portfolios, however, looking at the space in aggregate does not offer much diversification given that China overshadows the category.

A more granular, performance-driven approach could allow ETF investors to include emerging markets in their portfolio with better results.

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