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Emerging Market ETFs Roar Back to New Heights

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After underperforming for most of this year, emerging markets stocks soared to their highest levels in two and a half years on Thursday, driven by new stimulus pledges by the Chinese government, a big rate cut from the Fed last week and hopes of further easing. A weak dollar also added to the strength.

Notably, MSCI Emerging Market Stock Index rose 2.3% — the most since November — and logged its six-day winning streak. Amid the optimism, emerging market ETFs also moved in tandem with the stock market and touched a new 52-week high in the latest trading session. The most popular ETF — iShares Core MSCI Emerging Markets ETF (IEMG - Free Report) — also hit new highs and is now up 12.6% in the first nine months of the year. 

We have highlighted five ETFs that touched new highs and are leading the space higher this year. These are Emerging Markets Internet UCITS ETF (EMQQ - Free Report) , Schwab Fundamental Emerging Markets Equity ETF (FNDE - Free Report) , Invesco FTSE RAFI Emerging Markets ETF (PXH - Free Report) , Schwab Emerging Markets Equity ETF (SCHE - Free Report) and SPDR Portfolio Emerging Markets ETF (SPEM - Free Report) .

These are also expected to continue outperforming, provided the fundamentals remain intact.

China Stimulus Measures

Beijing unveiled a stimulus package aimed at reviving the world’s second-largest economy. The policies include more fiscal spending, measures to stabilize the property sector and “forceful” rate cuts. The government also plans to lower the reserve requirement ratio that dictates the amount of capital banks must hold, and introduce 800 billion Chinese yuan in liquidity support (read: A Few Reasons to Buy China ETFs Now).

A Big Rate Cut from the Fed

Federal Reserve Chair Jerome Powell kicked off the monetary easing cycle with a big interest rate cut of 50 basis points after holding it at a 23-year high for 14 consecutive months since July 2023. This marked the first rate cut since 2020 to address slowing economic growth and showed greater confidence.

More Cuts Ahead

The central bank projects two more rate cuts of 50 bps in its final two meetings this year, due in November and December. It indicates another 100-bps rate cut next year and a 50-bps cut in 2026, which means four rate cuts in 2025 and two in 2026 (read: Fed Initiates Rate Cuts: Top-Ranked Growth ETFs to Buy).

Weak Dollar

An impressive rally was also driven by a weak dollar against the basket of currencies. A weakening dollar pulls in more capital into emerging markets, propelling stocks higher for most emerging nations. 

The dollar is on track for the fourth consecutive week of declines. The greenback is expected to remain under pressure, given the cheap money flowing into the economy and the prospect of further easing. Traders are now pricing in 73 bps of easing in the rest of the year, with a 51% chance of another outsized half-percentage-point cut, according to CME Group's FedWatch Tool.

ETFs in Focus

Emerging Markets Internet UCITS ETF (EMQQ - Free Report)

Emerging Markets Internet UCITS ETF seeks to provide exposure to the growth of online consumption in the developing world as middle classes expand and affordable smartphones provide unprecedentedly large swaths of the population with access to the Internet for the first time. The emerging markets ETF tracks an index of leading internet and e-commerce companies that serve emerging markets, including search engines, online retailers, social networks, online video, online gaming, e-payment systems and online travel. It holds 66 stocks in its basket with Chinese firms making up 40.2% of the assets, followed by India (18.9%). 

Emerging Markets Internet UCITS ETF has accumulated $388 million in its asset base and charges 86 bps in annual fees. The fund has soared 21.5% so far this year.

Schwab Fundamental Emerging Markets Equity ETF (FNDE - Free Report)

Schwab Fundamental Emerging Markets Equity ETF tracks the RAFI Fundamental High Liquidity Emerging Markets Index, holding 431 stocks in its basket. Here again, Chinese firms dominate the portfolio with a 34.2% share, while Taiwan, India and Brazil round off the next three with double-digit exposure each. 

Schwab Fundamental Emerging Markets Equity ETF has amassed $6.4 billion in its asset base and charges 39 bps in fees per year from investors. It has risen 17% this year and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Invesco FTSE RAFI Emerging Markets ETF (PXH - Free Report)

Invesco FTSE RAFI Emerging Markets ETF offers exposure to the largest emerging market equities based on the four fundamental measures — book value, cash flow, sales and dividends — by tracking the FTSE RAFI Emerging Index. It holds a basket of 412 stocks. China takes the largest share at 39.2%, while Taiwan and India round off the next two with a double-digit exposure each. 

Invesco FTSE RAFI Emerging Markets ETF has AUM of $1.2 billion and charges 49 bps in annual fees. It has gained 16.5% so far this year and has a Zacks ETF Rank #3 with a Medium risk outlook.

Schwab Emerging Markets Equity ETF (SCHE - Free Report)

Schwab Emerging Markets Equity ETF follows the FTSE Emerging Index and holds a broad basket of 2055 stocks in its portfolio. China, India and Taiwan are the top three countries, with 28.1%, 23.4% and 20.6% share, respectively. 

Schwab Emerging Markets Equity ETF has AUM of $9.4 billion and charges 11 bps in annual fees. SCHE has returned 15.5% so far this year and has a Zacks ETF Rank #3 with a Medium risk outlook.

SPDR Portfolio Emerging Markets ETF (SPEM - Free Report)

With AUM of $9.7 billion, SPDR Portfolio Emerging Markets ETF follows the S&P Emerging BMI Index and charges 7 bps in annual fees. It holds a broad basket of 3,155 stocks, with China and India taking the largest share at 26.1% and 24.5%, respectively. Taiwan rounds off the next spot with 20.4% of the assets (read: ETFs to Boost Gains Amid Rising Rate Cut Expectations). 

SPDR Portfolio Emerging Markets ETF has gained 15.4% this year and has a Zacks ETF Rank #3.

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