Will the beginning of a new decade reignite emerging-market stocks? After abysmal performance during the 2010s, emerging markets have failed to live up to their promising name.

The share price on the iShares MSCI Emerging Markets ETF (EEM), with $31 billion and one of the largest funds of its kind, has gained just 34.1% during the past 10 years compared to a gain of 143.3% for the Vanguard Total World Stock ETF (VT). Similarly, EEM has underperformed developed-market funds such as the iShares MSCI EAFE ETF (EFA) and the Vanguard Total U.S. Stock Market ETF (VTI).

Before the 1980s, emerging markets were known as “less-developed countries,” or LDCs. The term “emerging markets” replaced LDCs after receiving wider acceptance when it was coined in 1981 by World Bank economist Antoine Van Agtmael.

For investors and financial advisors, emerging markets represent countries with smaller, riskier and less liquid financial markets. They can also be thought of as countries that may someday become bona fide developed markets. Today, the largest emerging-market countries are Brazil, Russia, India and China—collectively known as the “BRICs.” 

During the 2000s decade, the MSCI EM index gained 150%, outrunning most global equity markets including the U.S. But the impressive outperformance didn’t repeat itself during the 2010s decade.

As of late, problems facing emerging markets have been amplified in Asia. 

For example, China has been embroiled with the U.S. in a trade war that sought to tax up to $525 billion on Chinese exports. Although a “phase one” agreement will go into effect on February 14, China is now dealing with another crisis: an outbreak of the coronavirus.

The economic toll from the coronavirus epidemic is still in its infancy but is already being felt. A number of countries have taken pre-emptive steps to restrict or ban travel to mainland China. In Hong Kong, government officials halted rail service to mainland China and cut the number of flights in half. China’s further isolation could trigger an economic slowdown as business and tourism decelerates.

Since the start of the year, the Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR) has tumbled almost 11% while the SPDR S&P China ETF (GXC) has declined 6.5%. ASHR holds exposure to mainland companies known as “A-shares,” whereas GXC excludes A-shares and holds most of its exposure in Hong Kong-listed companies.

Elsewhere in emerging markets, the iShares Latin America ETF (ILF) is down 7.9%. Some of the problems can be linked back to China, as reduced economic activity in turn reduces demand for energy commodities that Latin American countries export.

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