Emerging Markets have been the darling of many investors during this past year. The 1-year chart comparing VWO, ILF vs. the S&P; 500 clearly demonstrates the difference in performance:
During the early phase of an economic recovery, these funds tend to lead the pack and offer great opportunities, but for how long?
If you chart the same funds, but use a 6-months time frame, a different picture emerges:
If you bought the emerging markets a year ago, you are sitting on nice profits, if you bought them 6 months ago, you may wondering why they’re lagging the S&P; 500.
While emerging markets are usually leaders on the way up as a recovery materializes, they will also be leaders on the way down, when a recovery stalls or even ends. Since you can never be sure which way things will play out, trend direction and momentum figures can assist you.
In this case, 4-wk momentum did not give much of a clue, but YTD, the S&P; 500 (as represented by SPY) sports a +7.12% figure compared to VWO’s +3.78% and ILF’s +1.23%. SPY also leads in the M-Index department.
The point is that it’s not wise to only look at a long-term chart when comparing funds and evaluating performance and momentum. You also need to look at a shorter time frame when tracking trends to spot any divergences pointing to a directional change that might not have been obvious from a long-term chart.
Disclosure: We have holdings in the above mentioned funds.