Fed Rate Cuts Could Be Just What Doctor Ordered for EM ETFs

Emerging markets equities and the related ETFs have long been responsive to Federal Reserve decisions on U.S. interest rates. This indicates that if the central pares rates this year, some upside could be in store for those long-lagging assets.

The MSCI Emerging Markets Index is up more than 2% year-to-date. There are inklings that developing world equities are pricing in Fed easing. That could signal to investors that it’s time to be selective with emerging markets ETFs – an objective accomplished with the KraneShares Dynamic Emerging Markets Strategy ETF (KEM).

As an actively managed fund of funds with allocations to the KraneShares MSCI All China Index ETF (KALL) and the KraneShares MSCI Emerging Markets ex China Index ETF (KEMX), KEM could be ideally positioned to benefit from lower interest rates in the U.S.

History on KEM’s Side

KEM turns a year old in August, so it hasn’t been around for a true easing cycle. Additionally, it missed most of the prior tightening cycle. However, the history of emerging markets stocks following the end of U.S. rate tightening could prove meaningful as it pertains to the KraneShares ETF.

“Since 1988, EM equities have delivered positive performance 24 months after the last Fed rate hike in four of the past five Fed rate cycles. On average, returns have been solid at 29%, representing an average outperformance over developed markets of 17 percentage points,” according to JPMorgan Asset Management.