Recent studies of emerging markets show their investment opportunities may be greater than most investors realize. One study believes that by 2020 the aggregate GDP of emerging markets will overtake that of developed economies around the world. Another one has the number of global consumers hitting 1.8 billion by 2025, with the majority of them living in emerging markets. Lastly, it is believed consumer spending in emerging markets will grow three times faster than that of developed markets in the coming years.
All three of these stats indicate there could soon be a huge growth opportunity in developing markets around the world. But there are a lot of emerging market ETFs that are down more than 9% year-to-date while the SPDR S&P 500 ETF (SPY) is up more than 10% and hitting new all-time highs. With that being said, many experts are beginning to grow weary of U.S. equities as we have now set a new record regarding the length of our current bull-market and valuations appear to be stretched.
When we take all of this into consideration, moving money to emerging market funds now may turn out to be a good long-term asset allocation play. So, let's take a look at a few funds which look appealing due to their rough 2018.
The first two are the Vanguard FTSE Emerging Markets ETF (VWO) and its direct competitor the Schwab Emerging Markets Equity ETF (SCHE). Both of these funds are large, liquid and have low fee’s; 0.14% and 0.13% respectively. They also both don’t consider South Korea an emerging market but hold positions based in Hong Kong, Taiwan, India, China, South Africa, Brazil, Russia, and Mexico to name the top 8 countries based on holdings. Both have an index weighting based on market cap and have a weighted market cap of around $80 billion, meaning you’re getting great foreign large-cap exposure.
But, year to date VWO is down 8.91% while SCHE is off by 7.98%. Each fund also performed poorly in September, dropping 1.35% and 0.66% respectively. Both also pay a distribution yield of more than 2.5%, with VWO paying 2.56% and SCHE offering a yield of 2.51%.
Two other options are BlackRock’s products the iShares MSCI Emerging Markets ETF (EEM) and the iShares Core MSCI Emerging Markets ETF (IEMG). Both funds offer exposure to the same emerging market economies as VWO and SCHE but add in South Korea. The main difference between the two funds is that IEMG offers broader exposure since it includes small and micro-cap stocks in emerging markets. Some may consider EEM less risky since it doesn’t hold the smaller organizations, but that would also indicate it may have limited upside. Regardless though, both funds are down more than 8% year to date. Another big difference is that EEM has a high expense ratio of 0.69%, while IEMG will only cost you 0.14% per year.
If you looking for something with lower volatility than those mentioned above than perhaps the iShares Edge MSCI Min Vol Emerging Markets ETF (EEMV) is a better choice. Year-to-date the fund has performed to its name as its only down 1.55%. The fund reaches its goal of lower volatile by avoiding a market cap-based portfolio and setting its own standards as to how the fund will be positioned. While all four of the previously mentioned funds have a weighted average market cap of above or just slightly below $80 billion, EEMV’s weighted average market cap is just $43 billion. The fund will cost more than most of the others as its expense ratio is 0.25%.
There are many reasons why emerging markets have been outperforming the U.S. year-to-date, but the most likely culprit is the current trade wars going on between those in Washington and heads of others States. We all know the markets don’t like uncertainty, so once the back and forth and retaliation tariffs end, we could see a nice bump in emerging market stock prices.
Lastly, it should be noted that most U.S. based investors should still have a large percentage of their investments based in the U.S., but it can be a wise move to have somewhere around 10% up to 20% in foreign and developing markets moving forward.
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: This contributor held long positions in Apple, Tesla, Intel, Google, Amazon.com, Facebook, Priceline and Microsoft at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
