ETF Strategist

Emerging market ETFs are on a tear—here's why

Emerging markets roared like a lion in March, and they've continued their surge into April.

As of mid-day Wednesday, iShares MSCI Emerging Markets ETF was up more than 7 percent since March 19, the result of the exchange-traded fund's best nine-day winning streak since September.

The stock exchange in Istanbul.
Kerem Uzel | Bloomberg | Getty Images

Other emerging-market ETFs have performed strongly. India is up 8 percent and China climbed 8 percent during the period, while Russia is up 7 percent, has jumped more than 11 percent and Turkey is a heady 14.75 percent higher.

Art Hogan, chief market strategist at Wunderlich Securities, said he sees several factors driving emerging markets' recent outperformance.

The most immediate reason may be a relative cooling of tensions in Ukraine and an easing of fears about a potential hot war.

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"Diplomacy seems to be working, and the situation seems to be contained," Hogan said.

Another more fundamental variable may be emerging markets' relative underperformance against developed markets.

Are emerging markets making a comeback?
Are emerging markets making a comeback?

"On a year-to-date basis, emerging markets are still lagging the U.S. and the E.U.," said Hogan. "As you look at global investing, at some point in time you see the underperformance, and it's not surprising to see a bit of mean reversion."

Michael Krause, chief analyst at ETF-focused Altavista Research, agreed.

"Emerging markets in general have been sold off hard over the last six months," said Krause. "On a valuation basis, they are as cheap as they were during the global financial crisis."

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That cheap valuation may have led to funds rebalancing their holdings ahead of the first quarter's end on Monday, Morningstar senior fund analyst Patricia Oey said.

"Valuation people are looking at these markets and saying, 'This is cheap enough, let's get in,'" she said.

The changes in the Federal Reserve's quantitative easing policy have also played a key role.

When a tapering of the Fed's easy money policy was first mentioned by officials there last year, emerging markets were hit by continued expectations of a strengthening dollar and resulting weakened purchasing power for emerging markets, said Hogan.

"That's been tempered a bit over the past couple of weeks," he said. "We haven't really seen a firming of the U.S. dollar, even having been in the tapering process for several Fed meeting cycles."

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Krause also sees the Fed as a driver behind emerging markets' performance.

"With Yellen's comments from about nine days ago that tapering will continue, the expectation is that the tapering will continue and interest rates will eventually rise," said Krause. "That's bad for high-multiple, high-valuation stocks, but it's good for low-multiple, cheap-valuation stocks, and that really characterizes emerging markets."

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