2023-06-23 15:05:37 ET
Summary
- Emerging markets have struggled on a relative basis in 2023, and I reiterate my hold rating.
- IEMG is a low-cost option for long-term investors seeking exposure to emerging market equities, with its 0.09% expense ratio and a forward P/E ratio of 12.
- Despite attractive valuations, weak momentum and soft technical trends present headwinds for the fund, especially with the often-volatile Q3 on the doorstep.
- I highlight key price levels to monitor as the second half ensues.
Emerging markets continue to struggle in 2023. While the iShares MSCI Emerging Markets ETF (EEM) is often cited as the primary EM fund to track, there is a lower-cost core version that features similar performance. Either way, emerging markets have drifted back toward the flat line in YTD performance. Higher interest rates have offset the slightly weaker dollar lately, all while uncertainties in China weigh on the broad space.
I reiterate my hold rating on the iShares Core MSCI Emerging Markets ETF (IEMG). I like the valuation but technical trends, along with soft seasonality right now, are significant headwinds.
EM Equities Up Just 4% In 2023
According to the issuer, IEMG seeks to track the investment results of an index composed of large, mid, and small-capitalization emerging market equities. The fund offers investors exposure to a broad range of emerging market companies at a low cost. IEMG is an ideal choice for long-term investors seeking ownership of EM stocks.
IEMG costs just 0.09% annually to own, must cheaper than EEM’s 0.69% expense ratio. IEMG is a large ETF with more than $71 billion in assets under management, and it pays a yield of 2.3%, about 50 basis points above that of the S&P 500. Average daily volume is high at more than 11 million shares while its 30-day median bid/ask spread is a narrow two basis points, so tradeability is high. With a more than 10-year track record of tight pricing compared to NAV, investors can be confident that IEMG will meet its objectives.
The portfolio consists of 2,725 stocks as of June 22, 2023, per iShares. With an equity beta compared to the S&P 500 of 0.66, its standard deviation is actually not that severe despite EM’s volatile reputation – the 3-year SD is 18.4%. On valuation, the forward P/E ratio is near 12, significantly under the S&P 500’s 19x earnings multiple. According to Morningstar, IEMG is focused in the large-cap space with a roughly evenly balanced mix of value and growth equities. Factor-wise, there isn’t a standout characteristic – momentum, and earnings quality factors are near neutral.
IEMG Portfolio & Factor Profiles
What sets EM quite a bit different from the SPX, though, is its sector weighting. The value-focused Financials sector makes up about one-fifth of the portfolio, while Information Technology is a lower weight compared to domestic large caps.
IEMG: Overweight Financials, Underweight Tech (Vs The S&P 500)
Seasonally, there is not much to like about EM's performance right now. While over the past 10 years, according to Equity Clock , IEMG has returned 1% on average in July with a 60% success rate, price action is merely sideways now through September. Q4 often sees stronger returns, so a cautious stance is suggested as we get closer to the start of the third quarter.
IEMG: Weak Q3 Seasonality Looms
The Technical Take
IEMG continues to consolidate off a low notched last October. Notice in the chart below that the ETF is still working on a bearish to bullish reversal pattern. Earlier this year, I highlighted a pair of head and shoulders formations. What’s positive is that the short-term pattern was defended by the bulls – a neckline noted near the $46 mark was indeed support.
But the bears still claim victory in the longer term, with persistent resistance in the $52 to $53 area. With a flat 200-day moving average, we certainly appear to have an ongoing battle between the bulls and bears. Keep your eye on $45 and $53 as pivotal price points. Overall, the chart remains neutral, while relative strength to the US stock market is poor.
IEMG: Bullish Rounded Bottom In the Making, But Not All-Clear Yet
The Bottom Line
I reiterate my hold rating on IEMG. The fund is an ideal vehicle for long-term investors seeking a low-cost and tax-efficient EM ETF, and the valuation is attractive, but momentum is weak, and the technical situation remains soft with the often-volatile Q3 lying ahead.
For further details see:
Emerging Markets Remain Challenged, Watch Out For Q3 Volatility In IEMG