Oil and lithium make diamonds in the EM rough for ETF investors

Brazil, Nigeria, Chile and Saudi Arabia lead the way as some countries buck dismal trend.

  • By Emma Boyde,
  • Financial Times
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Emerging market exchange traded funds have diverged sharply this year, with vehicles focused on big commodity exporters dodging the storm that has hit the broader asset class.

The war in Ukraine, a surging US dollar and chaos in Sri Lanka has dealt a powerful blow to developing economies in 2022. But some countries avoided the broader slump because they are beneficiaries of the broader trends shaping global markets this year.

“The strong dollar does tend to be negative for emerging markets but with over 20 countries to choose from there will always be relative winners,” said Charlie Robertson, global chief economist at Renaissance Capital, an investment bank that specialises in emerging markets.

Kenneth Lamont, senior fund analyst for passive strategies at Morningstar agreed, pointing out that despite plunging local currencies, a handful of ETFs had registered positive returns this year.

“Brazil, Nigeria, Chile and Saudi Arabia ETFs lead that bunch. The petrochemical economies in that group have clearly benefited from the soaring price of energy,” he said, adding that the largest ETFs tracking indices focused on those countries had almost no exposure to information technology stocks. This also “played heavily in their favour as the tech bubble has deflated”, said Lamont.

One of the best performing non-leveraged emerging market ETFs this year, according to TrackInsight, has been the iShares MSCI Chile ETF (ECH).

It has delivered returns of nearly 14 per cent in the year to July 21, VettaFi data show. In contrast, the SPDR S&P 500 ETF Trust (SPY) — which tracks large US companies — was down more than 15 per cent over the same time period.

“Chile is home to the world’s largest lithium producer, which has been a standout driver of that ETF’s performance this year,” said Lamont. ECH has a weighting of nearly 24 per cent to Sociedad Quimica y Minera de Chile (SQM), which has risen more than 80 per cent since the start of the year.

Other emerging market ETFs with heavy exposure to China or Taiwan have fared worse because the funds tended to be very tech heavy, said Todd Rosenbluth, head of research at VettaFi.

To illustrate his point EMQQ (EMQQ), Emerging Markets Internet and Ecommerce ETF, which rose to prominence after notching up returns in excess of 80 per cent in 2020, was down nearly 25 per cent in the year to July 21. The fund had a 51.6 per cent weighting to China on July 22.

“While emerging markets are lumped together they are not all aligned,” said Rosenbluth, adding that this was why a broad emerging market ETF was often favoured by investors so it could dilute country-specific risk through diversification.

This year, however, that strategy has not paid off. Data from TrackInsight show that broad emerging market ETFs are on average down about 17 per cent.

“The EM label serves to obscure what really is [a] motley crew of very different markets,” said Lamont.

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