Stronger-than-expected inflation data and blowout job growth in September reignited interest rate worries. Amid the increasing possibility of another rate hike by the Fed, rising Treasury yields, and growing geopolitical tensions due to conflict between Israel and Hamas, the stock market could remain highly volatile in the near term.

Therefore, best-performing emerging markets ETFs WisdomTree Emerging Markets High Dividend Fund (DEM), SPDR S&P Emerging Markets Small Cap ETF (EWX), and First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS) could be ideal buys for instant diversification and potential gains.

The Consumer Price Index grew 0.4% in September and 3.7% year-over-year, according to a Bureau of Labor Statistics report. Dow Jones estimates were 0.3% and 3.6%, respectively. The core inflation, excluding food and energy prices, increased 0.3% for the month and 4.1% from a year earlier, in line with economists’ expectations.

The data follows a stronger-than-anticipated producer price index reading for September. Persistent inflation reignited interest rate fears.

Further, robust job growth in September poked a hole in the Federal Reserve’s cooldown narrative. The U.S. economy added about 336,000 jobs last month, almost twice what economists expected. Also, data for August was revised higher to show 227,000 jobs were added instead of the previously reported 187,000.

The recent surge in U.S. treasury yields has also sparked more anxiety among investors. On Friday, the yield on the 10-year U.S. Treasury note jumped to 4.88% for the first time since 2007, while the 30-year offering reached 5.05%, which is also a 16-year peak.

Some investors on Wall Street are bracing for enhanced volatility into year-end as yields and oil prices surge, inflation remains sticky, the job market shows resilience, and conflict ensues in the Middle East. However, a focus on earnings and what the Fed will do with interest rates can provide investors optimism in the short term, according to Barclays analyst Ajay Rajadhyaksha.

“Bond volatility and Middle East tensions are a drag on risky assets, but should be offset by earnings and dovish Fedspeak,” Rajadhyaksha said in a note to clients.

Amid an uncertain macroeconomic backdrop, investors could consider adding the best-performing emerging market ETFs to their portfolios for greater diversification and solid returns. Most of these ETFs divide their assets among 20 or more nations, with a majority focus on the emerging markets of Asia and Latin America.

Emerging markets are often considered to have solid growth prospects due to investments in infrastructure, high exports, and the growing domestic consumption of the middle class.

In light of these favorable trends, let’s look at the fundamentals of the three top Emerging Markets Equities ETFs, beginning with number 3.

ETF #3: First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS)

FEMS aims to outperform other index funds by selecting emerging market securities using quantitative metrics. The fund scores each potential holding by value (book value-to-price, cash flow-to-price, and return on assets) and growth (3-,6- and 12-month price appreciation, sales-to-price, and 1-year sales growth) characteristics and then ranks stocks by whichever trait scores highest.

FEMS tracks the NASDAQ AlphaDEX EM Small Cap Index. The fund has assets under management (AUM) of $334.10 million. It currently has a total of 103 holdings. Its top holdings include Sok Marketler Ticaret AS (SOKM.E) with a 0.94% weighting, Zorlu Enerji Elektrik Uretim A.S. (ZOREN.E) at 0.89%, followed by Aliansce Sonae Shopping Centers S.A. (ALSO3) with a 0.87% weighting.

The fund has an expense ratio of 0.80% compared to the category average of 0.51%. Over the past six months, FEMS’ fund inflows came in at $31.91 million and $209.63 million over the past year. Also, the ETF has a beta of 0.92.

FEMS pays an annual dividend of $1.51, translating to a 4.04% yield at the prevailing price level. Its dividend payouts have grown at a 4% CAGR over the past five years. The fund’s four-year average yield is 4.98%.

FEMS has gained 14.4% over the past year to close the last trading session at $37.32. It has a NAV of $37.32 as of October 13, 2023.

FEMS’ POWR Ratings reflect this promising outlook. The fund’s overall A rating equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

The fund has an A grade for Trade, Peer, and Buy & Hold. Of the 101 ETFs in the Emerging Markets Equities ETFs group, it is ranked #3.

To access all FEMS’ POWR Ratings, click here.

ETF #2: SPDR S&P Emerging Markets Small Cap ETF (EWX)

EWX seeks to provide exposure to small-cap stocks in emerging markets. The selection universe includes emerging country equities with a market cap between $100 million and $2 billion at the time of inclusion. The fund is relatively efficient from a cost perspective and well-balanced in terms of individual securities sectors and countries.

EWX tracks S&P Emerging Markets Under USD2 Billion Index. With $787.30 million in AUM, its top holdings are U.S. Dollar with a 5.26% weighting in the fund, followed by Gigabyte Technology Co., Ltd. at 0.49%, and Alchip Technologies and State Street Institutional Liquid Reserves Fund at 0.43% and 0.34%, respectively. The fund has a total of 3,500 holdings.

The ETF has an expense ratio of 0.65% compared to the category average of 0.51%. EWX’s fund inflows were $89.09 million over the past six months and $130.03 million over the past year.

EWX pays an annual dividend of $1.31, which translates to a 2.48% yield at the current price level. The fund’s dividend payouts have grown at a 3.5% CAGR over the past three years. Also, its four-year average yield is 2.80%.

The fund has gained 7.4% year-to-date and 16.8% over the past year to close the last trading session at $53.01. It has a beta of 0.79. EWX’s NAV was $53.29 as of October 13, 2023.

EWX’s solid fundamentals are reflected in its POWR Ratings. The fund has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.

The fund has an A grade for Trade, Buy & Hold, and Peer. Within the 101 ETFs in the Emerging Markets Equities ETFs group, it is ranked #2.

Click here to see all the EWX ratings.

ETF #1: WisdomTree Emerging Markets High Dividend Fund (DEM)

DEM provides exposure to some of the highest dividend-yielding stocks within the emerging markets with a fundamental weighting system. The fund selects the top 30% of firms ranked by dividend yield from the WisdomTree Emerging Markets Dividend Index.

With $2.50 billion in AUM, DEM’s top holdings include Vale S.A. (VALE3), with a 5.01% weighting, followed by Petroleo Brasileiro SA (PETR3) at 4.65%, and MediaTek Inc. and China Construction Bank Corporation Class H with 4.22% and 2,94% weightings, respectively.

The fund currently has 427 holdings in total, with its top 15 assets comprising 35.92% of its AUM. DEM has an expense ratio of 0.63%, relative to the category average of 0.51%. Over the past three months, its fund inflows came in at $156.77 million and $371.09 million over the past six months.

DEM pays an annual dividend of $2.35, translating to a yield of 6.28% at the prevailing price level. Its four-year average dividend yield is 6.08%. Over the past three years, the fund’s dividend payments have grown at a CAGR of 8.5%.

The fund has gained 5.2% year-to-date and 13.2% over the past year to close the last trading session at $37.45. It has a beta of 0.75. DEM’s NAV was $37.73 as of October 13, 2023.

DEM’s POWR Ratings reflect this promising outlook. The fund’s overall A rating equates to a Strong Buy in our proprietary rating system.

DEM has an A grade for Peer and Buy & Hold and a B for Trade. It tops the list of 101 ETFs in the same group.

To access DEM’s rating for Peer, click here.

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DEM shares were unchanged in premarket trading Monday. Year-to-date, DEM has gained 10.45%, versus a 14.67% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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