Latin America Outperforms

The region that appears to have done the best among emerging market ETFs, however, is Latin America. While BRIC member Brazil saw the iShares ETF tracking its market decline nearly 63%, the ETFs tracking other areas of Latin America outperformed the broader emerging market ETFs.

The iShares S&P Latin America 40 Index Fund (NYSEArca: ILF), which covers Argentina, Mexico, Chile and Brazil, was down just 57.40% as of the end of last week—and Brazil and Argentina appear to be dragging down its performance. The iShares MSCI Mexico Investable Market Index Fund (NYSEArca: EWW) was down 55.04%, and the iShares MSCI Chile Index Fund (NYSEArca: ECH) was down just 43.63%, its returns closer to those of developed markets than emerging ones.

It may just be a matter of time before Latin America feels the full effects of the financial crisis. While Latin American banks did not involve themselves heavily with risky debt instruments such as credit default swaps, they are suffering from the lack of available or cheap credit and from currency-related investments that relied on a weakening dollar. The decline in the commodities market has also hit the area rather hard.

Perhaps the most dramatic recent event—and one that suggests that Latin American markets may be about to see their declines grow steeper—was Argentina's move to nationalize its private pension programs, which many believe is simply an effort to access the funds to cover the country's national debt. It was no doubt the reason for Argentina's benchmark Merval index suffering its worst week in 10 years, according to an article from Dow Jones Newswires.

Frontier Markets Least Affected              

Although there are only a few months of data available on the frontier market ETFs that were launched in 2008, comparing their performance over September and the first weeks of October with existing emerging and developed ETFs indicates they may be more "decoupled" from developed markets than emerging markets are.

The Claymore/BNY Frontier Markets ETF fell about 41.58% through September and October up to last Friday, when most of the worst declines hit. It outperformed both EEM and VWO, which were both down about 50% during this period, as well as GMM, which fell 47.58%. It probably helps that Chile, the country covered by the best-performing emerging markets ETF, was the second-largest country in FRN, representing nearly a quarter of the portfolio at the end of September.

The PowerShares MENA Portfolio (NasdaqGM: PMNA), covering the Middle East and North Africa, was down even less, with a 33% decline during September and the first few weeks of October. The Middle East, in particular, seems to be weathering the crisis well. The WisdomTree Middle East Dividend Fund (NasdaqGM: GULF) was down just 27.08% during the period, while the Market Vectors Gulf States Index ETF (NYSEArca: MES) was down 29.34%. The Market Vectors Africa Index ETF (NYSEArca: AFK) was down 41.56%.

Emerging markets, it seems, are now more subject to the fluctuations of the developed markets, which affect them more severely than they did before. However, it looks like frontier markets remain decoupled from larger economies. Although they are no doubt among the most fragile economies in the global economy, their limited ties to developed markets have helped to ameliorate the damage of the global financial crisis.

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