Mainly this year, we've been hearing about the financial troubles in the U.S. and what it means for the economy. But most people seem to have overlooked or minimized the fact that our troubles here have reverberated through global markets to even more severe effect.

At the end of last week, the SPDR S&P 500 ETF (NYSEArca: SPY) was down 39.53% year to date, with the iShares Russell 3000 Index Fund (NYSEArca: IWV) down nearly the same, with returns of -40.50%.

Meanwhile, the iShares MSCI EAFE Index Fund (NYSEArca: EFA) was down an even more dramatic 49.57%. And almost all the emerging markets ETFs saw even worse returns. 

While most investors view emerging markets as a source of diversification, the truth is that such markets have seen their performance begin to correlate more closely with developed markets in recent years as their economies. Emerging markets tend to be the producers of many of the commodities and manufactured goods that developed markets consume, thus when developed markets fall on hard times, more and more, so do emerging markets.

Also, in this particular instance, the credit crisis has spilled over to emerging markets, which are finding loans more expensive as their credit ratings are downgraded. Many such markets have liberalized their economies, following the model of developed markets, and find themselves without currency reserves to fall back upon in emergency.    

The popular iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM) and Vanguard Emerging Markets ETF (NYSEArca: VWO), which both track the MSCI Emerging Markets Index, were both down more than 60% for the same time period. And if there was any doubt that the financial crisis hit these two funds harder than developed markets, a look at the performance during September and the first few weeks of October shows SPY and IWV down a little more than 32% and EFA down about 38%. EEM and VWO were both down about 50%. The SPDR S&P Emerging Markets ETF (NYSEArca: GMM), which tracks the S&P/Citigroup BMI Emerging Markets Index, was down about 57%.

Interestingly, the emerging markets ETFs from PowerShares and WisdomTree both outperformed the other broad emerging markets ETFs. The PowerShares FTSE RAFI Emerging Markets Portfolio (NYSEArca: PXH) and the WisdomTree High-Yield Emerging Markets (NYSEArca: DEM) were down 56.57% and 43.21%, respectively. PXH tracks an index that uses a multi-factored fundamental weighting scheme, while DEM's underlying index is dividend-weighted.

BRIC Distress Acute

It seems the four largest emerging market countries were among the hardest hit, based on the performance of the BRIC ETFs. The Claymore/BNY BRIC ETF (NYSEArca: EEB) and the SPDR S&P BRIC 40 ETF (NYSEArca: BIK) were down 62.45% and 64.99%, respectively, year-to-date. ETFs tracking Brazil and China - the iShares MSCI Brazil Index Fund (NYSEArca: EWZ), the PowerShares Halter USX China Portfolio (NYSEArca: PGJ) and iShares FTSE/Xinhua China 25 Index Fund (NYSEArca: FXI) - were down between 61% and 63%, similar declines to the BRIC ETFs.

It looks like Russia and India are likely the prime culprits in the country group's more significant decline: The Market Vectors Russia ETF (NYSEArca: RSX) and the iPath MSCI India Index ETN (NYSEArca: INP) were down 74.77% and 70.67%, respectively.

Perhaps not surprisingly, it was reported recently that Russia had announced that the four BRIC countries would try to coordinate their efforts to combat the crisis.

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.