The returns offered by the iShares MSCI Emerging Markets Index Fund (NYSE: EEM), which has almost $51 billion in assets under management and is used by many professional investors as an emerging markets benchmark, indicate as much. EEM, the second-largest emerging markets ETF, returned 13.4% last year.
Given that EEM offers exposure (to varying degrees) to more than 20 countries, the ETF's 2012 performance could leave some investors thinking the just completed year was one big party for developing market equities. Unfortunately, that was not the case as some of the developing world's marquee countries, at least at the ETF level, were absolute laggards.
So while investors were tantalized by the jaw-dropping returns generated by ETFs tracking the likes of Mexico, the Philippines and Thailand just to name a few, chances are there were some mediocre performances from ETFs tracking countries in the same region.
However, there is an important factor when it comes to investing in emerging markets and it is one that runs counter to conventional wisdom.
The conventional wisdom is that it's best to avoid laggards and embrace leaders. But with emerging markets ETFs, they take turns moving between the leaders and laggards categories.
For example, the iShares MSCI Thailand Investable Market Index Fund (NYSE: THD) finished 2011 in the red. In 2012, THD gained over 36%, making it one of the best ETFs tracking any asset class.
While that doesn't mean THD is bound to be a laggard this year, it does mean some emerging markets funds that left investors with sour tastes in their mouths last year have the potential to soar in 2013.
Here are a couple to consider.
Investing in 2013: Indonesia
Regarding investable Southeast Asian nations in 2012, investors could have done much better than Indonesia, the region's largest economy.
The Market Vectors Indonesia ETF (NYSE: IDX) lost about 1.6% last year. While that loss is by no means horrific, it does mean IDX was a serious laggard compared to every other country-specific ETF tracking a Southeast Asian country, underperforming Malaysia, Thailand and Vietnam.
Part of the reason for IDX's woes in 2012 was perhaps a case of misinformation, as foreign investors have a tendency to look at the Indonesian economy as export-dependent. That was not a good thing last year when market participants were fretting about a slowing Chinese economy and the European sovereign debt crisis, the thinking being that China and the Eurozone represent two prime destinations for Southeast Asian exports.
In reality, Indonesia should be the envy of much of the developing world because the country shares something in common with the United States: Domestic consumption is the primary driver of gross domestic product (GDP).
The Indonesian consumer accounts for 60% of that country's GDP and it is strength in terms of domestic consumption that lead the World Bank to forecast Indonesian GDP growth of 6.3% for this year.
For those that need convincing that Indonesia represents a value proposition, consider this: IDX has a price/earnings ratio of just 0.58 and a price-to-book ratio of 2.8, indicating that the stocks the ETF is home to are cheap relative to the broader emerging markets universe.
Investing in 2013: Chile
To be fair, it must be noted that the iShares MSCI Chile Investable Market Index Fund (NYSE: ECH) returned over 8% last year. However, that lands Chile in the laggard column because comparable ETFs devoted to Colombia, Peru and Mexico were all vastly superior, not to mention the far less volatile S&P 500 returned more as well.
While Indonesia is an oft-misunderstood economy, ECH is an ETF that is often viewed in the wrong light by investors. The one thing that most Americans know about Chile, besides the fact it is a South American nation, is that it is also the world's largest copper-producing country. That leads many to view ECH as strictly a materials play when nothing could be further from the truth.
Materials names are merely ECH's third-largest sector weight as the fund is well-diversified across utilities, banks (Chile is home to perhaps the most advanced banking system in South America), staples and industrial names.
Importantly, Chile is another economy where domestic demand is improving. Internal demand will expand 5.7% in 2013 after climbing 6.6% in 2012 and 9.4% in 2011, Bloomberg News reported, citing statistics from Chile's central bank.
There is another more familiar reason to consider ECH this year: If the Chinese economic turnaround is truly meaningful, that should lead to increased copper demand and prices. Whether it should is not the point, but that scenario would inevitably lead to upside for ECH.
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