MSCI Emerging Markets ETF Analysis

MSCI Emerging Market ETF Analysis including Factsheet

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Following the analysis of the MSCI World ETF, this review will focus on its counterpart, namely the MSCI Emerging Markets ETF. In this article, you will learn about the basic setup of the index, its potentials, risks and opportunities. In addition, you will get a glimpse of what the future may look like for the Emerging Markets ETFs.

Generally, the MSCI Emerging Markets mirrors the performance of about 1,200 stocks from 26 emerging nations and markets. Most of the securities included are Chinese stocks. These make up about 32 % of the index, followed by securities from South Korea (12 %). There are various ETFs emulating the MSCI Emerging Markets Index. The top provider by market capitalization is BlackRock’s iShares MSCI Emerging Markets UCITS ETF, with roughly 3 billion USD invested capital and a total expense ratio (TER) of 0.75 %. 

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Analysis

The performance of the MSCI World has been up roughly +6 % within the last year period. Within the last 5 years, it grew from 1,600 basis points to now 2,200 basis points, which is tantamount to a +35 % value increase. Its performance is even more impressive on a 25-year horizon. The index was noted at about 600 basis points in 1994 and gained roughly +270 % to this day. Although, there were huge setbacks during the bursts of the dotcom bubble in 2000 and the financial crisis in 2008. In the latter, the index actually lost more than -50 % in value.

This being said, it is apparent that the index – despite not being invested in the leading industrial economies – its performance is still linked and somewhat dependent on the success/failure of the leading global economies. The fact that 32 % of the indexes securities are Chinese Companies is another factor that needs closer examination. First, it is relevant to note that the MSCI Emerging Markets Index bases its constituents on market capitalization. Second, although this being highly debatable, China is still defined as an Emerging Nation by various sources.

Since China is the world’s second largest economy in terms of GDP, it comes as no surprise that it is the MSCI Emerging Markets top country constituent. The upside of Chinese securities playing such a dominant role within the MSCI Emerging Markets is definitely the past growth periods of the Chinese economy (roughly +7 % annual GDP growth in recent years). The downside of it is the “black box” of Chinese economical policy makers and uncertainties surrounding trade and tariff discussions, especially with the U.S.

Outlook

As already indicated in our previous analysis, we believe that these are times of comparably high uncertainty surrounding the markets. We may have reached a crossroads, where any political or economic decision may keep us either from running into a recession or putting us right into one. Considering this being one of the longest bull markets ever recorded, it is not unlikely that we are due for an economic downturn, which will also have an impact on the Emerging markets. Yet, in the long run, it is almost guaranteed that today’s emerging nations will be the futures booster for global economic growth. Therefore, investing in the MSCI World Index, may likely pay out if a potential investor has the endurance and financial capabilities to pass through interim downturns.

Conclusion

The MSCI Emerging Markets Index is certainly one of the more popular indexes. The performance of the index has always shown good returns and did always recover fast from crisis in the past. In our mind, a potential investor who is considering investing in an ETF replicating the index should take special account of the following: First, a high dependency on Chinese stocks has served the index well during the last decades. The latest economic signals may however question whether this growth will continue in the future. Second, general global fiscal and political indicators point to an economic slowdown, which will also have an impact on the Emerging Markets. While no one will be able to predict when this downturn will actually happen – a cautious investor should still be wary of the mere possibility. Yet, the long-term outlook for emerging markets is quite promising, given the likelihood of their future contribution to the world global economy.