Diversified Emerging Markets Looks to Make a Change

Gregg Wolper: The diversified emerging-markets category had a really rough year in 2018. It wasn't really out of line with other foreign stock categories, but at a 16% loss, that was quite a blow for anyone investing in those funds. There were several reasons why those markets were down so much.

China played a big role. China is a huge part of the emerging-markets index and thus of most emerging-markets portfolios. The talk of the U.S. trade war with China, China's general economic slowdown--those took a toll on the market. More specifically, some of those high-flying Internet stocks from China that had done really well in 2017, they did very poorly in 2018. Those are big weightings in a lot of these funds. And so, that hurt very much.

Currency weakness was another issue. When foreign currencies drop against the U.S. dollar, that takes a bite out of returns for a U.S.-based investor. Some of these emerging-markets currencies had very poor years. Turkey, in particular, their currency dropped a lot. They are not a big part of the index, but for certain funds that had a few Turkish holdings, that was enough to really dent their returns. Brazil's stock market did surprisingly well, but its currency did not. That kind of offset the gains you got down there.

The good news is that in 2019 most of these trends have reversed so far. Emerging-markets funds are doing much better, but those trends will have to continue in a positive direction in order to make up for those deep losses of 2018.