Emerging Markets ETFs Consolidate Near Crucial Support

Stock prices may already factor in global growth fears

Emerging markets haven't delivered investors much joy in May as "risk-off" conditions take hold amid a breakdown in U.S.-China trade negotiations, which threatens to derail global economic growth.

"The direction of emerging-market equities is hanging in the balance of the global risk environment and likely dependent on U.S.-China talks at least in the short term," Goldman Sachs strategists Caesar Maasry and Ron Gray wrote in a note last week, per Bloomberg.

To add further downward pressure, investors have flocked to the greenback for its safe-haven status, which makes it more expensive for many emerging market countries that run high current account deficits and service debt denominated in U.S. dollars. On a relative basis, the iShares MSCI Emerging Markets ETF (EEM) has underperformed the S&P 500 this month by roughly 3% to return -8.23% as of May 30.

From a technical standpoint, emerging markets exchange-traded funds (ETFs) have stabilized at crucial support levels, hinting that prices have already factored in the challenges facing developing economies. At a fundamental level, low price-to-earnings ratios (P/E ratios) in emerging markets stocks have made them prime value plays. Let's look at several ways to trade these high-risk/high-reward markets using the three funds discussed below.

Vanguard FTSE Emerging Markets Index Fund ETF Shares (VWO)

Formed in 2005, the Vanguard FTSE Emerging Markets Index Fund ETF Shares (VWO) uses an indexing investment approach to closely track the performance of the FTSE Emerging Markets All Cap China A Inclusion Index. It does an excellent job at covering major emerging markets – such as China, Taiwan, India and Brazil – although it does exclude South Korea. The fund tilts toward the financial and technology sectors with respective allocations of 28.53% and 23.51%. A turnover of nearly 13 million shares per day and a razor-thin 0.02% spread help minimize trading costs. Long-term holders will appreciate the ETF's low management fee of just 0.12% – 27 basis points below the category average. As of May 30, 2019, VWO has assets under management (AUM) of $89.09 billion, offers an attractive 2.52% dividend yield and is up 5.11% on the year.

VWO shares trended nearly 20% higher between January and April but have given back about half of those gains in May as the trade war escalated and the U.S. dollar rose. The recent pullback has found support at $39.50 from a horizontal trendline that connects several reactionary swing levels over the past 12 months. VWO's push higher from this area in Wednesday's trading session indicates some buying interest creeping back into the fund. Those who take a trade should look to book profits on a test of the April swing high at $44.19. Manage risk by placing a stop-loss order under this month's low and amending it to the breakeven point if the price crosses above the 50-day simple moving average (SMA).

Chart depicting the share price of the Vanguard FTSE Emerging Markets Index Fund ETF Shares (VWO)

First Trust Emerging Markets AlphaDEX Fund (FEM)

With net assets of $697.21 million, the First Trust Emerging Markets AlphaDEX Fund (FEM) seeks to provide similar returns to the NASDAQ AlphaDEX® Emerging Markets Index. The ETF uses a quantitative methodology that selects emerging market stocks positioned to outperform. FEM takes a sizable bet on China and Brazil, with allocations of 33.69% and 14.87%, respectively. In terms of sector exposure, materials, energy, industrials, real estate and utilities all carry double-digit weightings. The ETF, which pays a 3.26% dividend yield, has gained just 1.21% year to date (YTD) as of May 30, 2019. FEM's 0.80% expense ratio is on the high side but won't overly affect short-term traders.

A Mount St. Helens-like formation stands out on the FEM chart. The fund trended sharply higher in January, traded sideways over the next three months and has declined rapidly in May. The significant October and December swing lows have provided support for the current retracement, with the price stabilizing at this level. Buyers should consider setting a take-profit order near the top of the February to April trading range at around $25.70. Protect trading capital by setting a stop under the 52-week low at $22.14 and moving it up to breakeven it the fund's price clears the $24.50 resistance level.

Chart depicting the share price of the First Trust Emerging Markets AlphaDEX Fund (FEM)

SPDR S&P Emerging Markets Dividend ETF (EDIV)

The SPDR S&P Emerging Markets Dividend ETF (EDIV) aims to provide investment results that correspond to the S&P Emerging Markets Dividend Opportunities Index. As its name suggests, the fund, with AUM of $455.04 million, selects high dividend paying stocks in emerging markets – it currently yields 3.21%. EDIV's pursuit of attractive dividends causes it to deviate from its tracking index and underperform emerging market returns from time to time. The ETF's manager diversifies risk by limiting country and sector exposure to 25% and not allocating more than 3% to any single holding. China commands the top country weighting at 21.68%, followed by South Africa at 17.92% and Taiwan at 17.06%. Key stocks in the fund's basket of 107 holdings include Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro (RSHYY), PTT Public Company Limited (PUTRY) and PTT Global Chemical Public Company Limited (PTTGC.BK). EDIV has a YTD return of 1.78% as of May 30, 2019.

EDIV shares have traded in a range between $31 and $32.75 for most of 2019. Over the past six weeks, the fund's price has retraced toward the 200-day SMA and horizontal line support that provides a tempting swing trading opportunity. The ETF jumped 1.55% and closed above its 200-day SMA in Wednesday trade, which indicates that the current pullback may be over. Those who enter here should keep a tight stop below the May 28 low at $30.26 and lock in profits if the price tests the January and April swing highs.

Chart depicting the share price of the SPDR S&P Emerging Markets Dividend ETF (EDIV)
Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.