VWO - VWO: Finishing A Disappointing 2023 Risks Remain In The Year Ahead

2023-12-11 01:24:15 ET

Summary

• Emerging Markets have a cheap forward P/E multiple of 11.6, making them compelling from a valuation perspective.
• Vanguard FTSE Emerging Markets ETF offers low cost and exposure to EM country stocks, but its technical situation remains weak.
• VWO has a large asset size, low expense ratio, and narrow bid/ask spread, but it has underperformed the US equity market and has weak price action.
• I highlight key price levels to watch on VWO as we head into 2024.

Each month, I eagerly await the publication of the J.P. Morgan Asset Management Guide to the Markets report . Among the dozens of insightful charts is a look at global stock market valuations. As of the end of November, Emerging Markets feature a dirt-cheap forward price-to-earnings multiple of just 11.6, right near its 25-year average. Contrast that to the US equity market priced at 18.7x earnings. Clearly, China's now single-digit P/E makes the space compelling from a valuation perspective.

Still, I reiterate my hold rating on the Vanguard FTSE Emerging Markets ETF (VWO). I like the valuation and its low cost, but the technical situation remains weak.

Global Stock Market Valuations: EM Under 12x Earnings

For background, VWO invests in shares of companies located in emerging markets around the world, such as China, Brazil, Taiwan, and South Africa. Its goal is to closely track the return of the FTSE Emerging Markets All Cap China A Inclusion Index, according to Vanguard . VWO is a broad EM index ETF and features a very low 0.08% annual expense ratio, making it among the cheapest index funds offering exposure to EM country stocks.

It's a large ETF with more than $98 billion in assets under management and features strong liquidity considering its average daily trading volume is close to 10 million shares. Vanguard notes that the fund's 30-day median bid/ask spread is narrow at just two basis points, so using market orders during the trading days is just fine, in my opinion.

Ranked 35 out of 73 in its Sub Class Quant Ranking per Seeking Alpha, VWO has a yield above 3% - more than 1.3 percentage points above that of the S&P 500. Share price momentum is quite weak, though, evidenced by its D rating and severe underperformance to the US equity market over the many timeframes dating back to 2010. Nevertheless, the fund's Risk metrics are not all that bad as Emerging Markets have not been particularly volatile in the last year.

Digging into the portfolio, VWO is primarily a large-cap fund with more than three-quarters of the allocation considered large. The Bronze-rated, 4-star ETF by Morningstar has some mid- and small-cap exposure, and the research firm notes that its price-to-earnings ratio is barely above 11 while long-term earnings growth is robust above 9%. That makes for a PEG ratio under 1 - a compelling value for long-term investors seeking non-US equity diversification.

VWO: Portfolio & Factor Profiles

A key risk for VWO investors and those considering buying the fund is that it varies greatly from the sector composition of the S&P 500. The largest weight is Financials at more than 21% while Information Technology, nearly 30% of the SPX, is just 19% of VWO. There's generally more cyclical exposure and a smaller allocation to growth equities versus the US equity arena. VWO is diversified in the sense that the top 10 holdings account for just 17% of the fund.

VWO: Holdings & Dividend Information

VWO tends to rally, like the rest of the stock market, over the back half of December, according to data from Equity Clock . Shares have then often endured some volatility for much of the first quarter in VWO's 17-year history, so active investors may want to be patient and wait for a bout of volatility early in 2024 before entering the position.

VWO: Bullish Year-End Seasonal Trends

The Technical Take

VWO continues to trade in a $5 range. I noted the frustrating price action earlier this year , and it was a principal component of my hold rating. There are no signs of this consolidation ending time soon. Notice in the chart below that shares recently lifted off of key support in the $37 to $38 zone but paused just shy of $41. I expect the fund to rally toward $43 in the coming weeks, should the Santa Claus Rally indeed take place. Given cautious seasonal trends, however, a climb above $43 seems like a tough ask today. If we do see a bullish breakout, though, then a measured move price objective to just under the $49 mark would be in play, based on the $5.50 range we are currently in.

Also take a look at the volume by price indicator on the left side of the chart - there is a high amount of shares traded in the current range, making this area sticky from a price-trend perspective. Moreover, the long-term 200-day moving average is very flat, indicating no trend. The RSI momentum oscillator at the top of the graph is constructive following an upside break of a downtrend line. The thinking is that the breakout may portend an eventual price breakout, but that remains to be seen.

Overall, the chart is neutral to slightly bearish, but long with a stop under the late 2022 low should still work for current owners.

VWO: An Ongoing Trading Range, Monitoring $43 For A Breakout

The Bottom Line

I reiterate my hold rating on VWO. I see the valuation as quite compelling, but weak price action keeps flashing a strong 'avoid' signal. Weighing it all together, just staying on the sidelines appears like the right move as we head into 2024.

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