Talk about a good trade.
Emerging market exchange-traded funds should get a meaningful boost from the impending completion of a “phase one” trade deal between the United States and China, ETF industry leaders told CNBC’s “ETF Edge” on Monday.
U.S. and Chinese trade authorities are scheduled to sign a first-step trade deal into effect on Wednesday, a significant development in the yearslong dispute between the world’s two largest economies. Many are still unsure of how exactly the sweeping agreement will impact markets despite the rally in the major averages that stemmed from the early enthusiasm.
But “as China trade continues to improve, that’s going to help emerging markets in general,” ETF Trends CEO Tom Lydon said in the Monday interview.
Vanguard’s FTSE Emerging Markets ETF (VWO), iShares’ Core MSCI Emerging Markets ETF (IEMG) and iShares’ MSCI Emerging Markets ETF (EEM) are the three biggest emerging markets funds by total assets. Together, they account for more than $160 billion of the total assets in emerging market ETFs, according to ETF.com.
All three also had a strong year in 2019. VWO was up nearly 17%, IEMG climbed about 14% and EEM notched a nearly 15% annual gain.
Lydon expected those moves to continue, but what he found even more bullish was the move in smaller, more focused emerging-market ETFs like KraneShares’ CSI China Internet ETF (KWEB), which hit a fresh 52-week high on Monday.
“That’s booming,” Lydon said, adding that with emerging markets plays trading at a roughly 40% discount to U.S. stocks, they “are a deal at this point.”
After a 30% gain in 2019, KWEB is off to a strong start for 2020, up nearly 10.5% since the start of the year. That ETF holds Chinese internet companies “that provide similar services as Google, Facebook, Twitter, eBay, Amazon, etc.,” according to its website, with Alibaba and Tencent making up nearly 19% of the portfolio as its two biggest holdings.
Nick Colas, co-founder of DataTrek Research, said in the same “ETF Edge” interview that technology stocks broadly “should continue to work” this year as growth-focused ETFs regain popularity after underperforming value funds in 2019.
It’s also “a pretty bullish sign to see money flows into emerging markets,” Colas said. U.S.-listed emerging market ETFs pulled in more than $1 billion in one week in late December, and are typically helped by positive news on the trade front, per Bloomberg and ETFTrends.com. Investors have maintained interest so far in 2020, with emerging market funds pulling in about $1.5 billion at more than twice 2019’s run rate, according to DataTrek, Colas’ firm.
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“[Emerging market ETFs] tend to be the ones that will work in a late-stage part of the cycle when all the developed economies are chugging ahead and EM kind of comes along with it,” Colas said. “And it’s a very important point of validation that we are going to get a U.S.-China trade deal this week.”
VWO, IEMG and EEM all opened down less than 1% on Tuesday after climbing Monday on the back of investors’ trade optimism.
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