ETF Wrap: As U.S. stocks slump, here’s how the SPY ETF stacks up against global equities in third quarter

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The U.S. stock market, as measured by the S&P 500 index, is outperforming global equities in the third quarter despite a rough September, as the index faces its worst quarterly performance in a year with just one trading day left in the three-month period.

The iShares MSCI ACWI ex U.S. ETF
ACWX,
which tracks international stocks while excluding the U.S., is down 4.3% this quarter through Thursday on track for its first quarterly loss since the third quarter of 2022, FactSet data show.

The SPDR S&P 500 ETF Trust
SPY
is also heading for potentially its first quarterly drop since the same period, with a drop of 3.3% so far in the third quarter.

Third-quarter trading will wrap up Friday after what’s been a volatile month for markets. A surge in Treasury bond yields has hurt stocks as investor worry over the Federal Reserve keeping interest rates higher for longer.

Meanwhile, an ailing property sector and slowing growth in China, the world’s second largest economy after the U.S., is worrying investors who have been disappointed by its stimulus efforts. Chinese equities have weighed on the performance of emerging-markets stocks broadly. 

The iShares MSCI Emerging Markets ETF
EEM
is down 4.2% so far this quarter, trailing the S&P 500 index
SPX,
while faring a bit better than developed market equities in Europe, Australia and the Far East as tracked by iShares MSCI EAFE ETF
EFA,
according to FactSet data on Thursday afternoon.

“Demographics is destiny for emerging markets,” said Perth Tolle, founder of Life + Liberty Indexes, in an interview, but for China, “demographics is a time bomb that is now going off.”

Read: China reports first population drop in decades as birthrates plunge

China is by far the biggest weight in the iShares MSCI Emerging Markets ETF
EEM,
representing almost 30% of its portfolio as of Sept. 27, followed by India at nearly 16% and then Taiwan at almost 15%, according to the fund’s data on BlackRock’s website. 

Kristy Akullian, senior iShares investment strategist at BlackRock, said by phone that China is struggling with high youth unemployment and property-sector woes.

While investors’ expectations for the country were “really high coming into this year” because of the post-pandemic reopening of its economy, there’s now concern over slowing economic growth there, she said.

See: China-focused ETFs fall after country’s growth disappoints, deepening 2023 losses

China is “such a big part of the EM index” that some investors may want to separate it out from their emerging-market exposure, said Akullian. One way to do that is through the iShares MSCI Emerging Markets ex China ETF
EMXC,
which is down 3.9% so far this quarter. The fund has benefited from its exposure to India, the country making up the largest portion of its portfolio as of Sept. 27.

The iShares MSCI India ETF
INDA
is in positive territory so far in the third quarter, up slightly more than 1%, according to FactSet data.  

For a longer-term investment strategy in international equities, stocks in India stand to benefit from “megaforces” tied to demographics as the country has a much younger population and larger workforce compared with other countries in emerging markets, according to Akullian.

Measuring freedom

Tolle said that she is personally “bullish” on India as a result of its demographics and described the population as highly educated, but also has conflicting feelings about the country when viewed through a lens of freedom. From that investing perspective, India has been “borderline” in the past in terms of potentially making the grade for her Freedom 100 Emerging Markets ETF.

The ETF, which launched in 2019 and seeks to invest in countries with higher personal and economic freedom scores, currently excludes India as well as autocracies like China.

The Freedom 100 Emerging Markets ETF
FRDM,
whose top holdings include Taiwan, South Korea, Chile and  Poland, is down 10% in the third quarter, bringing its year-to-date gains to 2.3%, according to FactSet data.

So far in 2023, the fund is beating the iShares MSCI Emerging Markets ETF, which has eked out a gain of about 0.1% for the year through Thursday.

As for U.S. stocks, the SPDR S&P 500 ETF Trust remains up around 12% so far this year, while global equities excluding the country have trailed, with the iShares MSCI ACWI ex U.S. ETF posting a year-to-date gain of 3.5% over the same period. 

As usual, here’s your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good…

…and the bad

New ETFs

• Matthews said Sept. 22 that it launched five actively managed ETFs that add to its funds focused on emerging markets and Asia. The new funds are the Matthews Pacific Tiger Active ETF
  ASIA,
  Matthews India Active ETF
  INDE,
  Matthews Japan Active ETF
  JPAN,
  and Matthews Asia Dividend Active ETF
  ADVE
  and Matthews Emerging Markets Sustainable Future Active ETF
  EMSF.

• Capital Group announced on Sept. 28 that it launched five active ETFs, including its first multi-asset one plus two fixed-income and two equity funds. They are the Capital Group Core Balanced ETF CGBL, Capital Group Core Bond ETF CGCB, Capital Group Short Duration Municipal Income ETF CGSM, Capital Group Dividend Growers ETF CGDG and Capital Group International Equity ETF CGIE.

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