An emerging markets ETF can deliver long-term winnings to your diversified portfolio. Perhaps the straight equities portion of the portfolio has expanded with the broad market. This means that you’re searching for re-balancing opportunities. An emerging markets ETF, or exchange-traded portfolio, can add future returns of developing markets that may have recently lagged behind U.S. stock markets.
Many financial analysts say that emerging markets ETF investments are excellent on the long-term. On a reversion to mean basis, the emerging markets ETF may return better than average results of developed equity markets in years to come. Look carefully: you might identify price disparity between the underlying index portfolio and the emerging markets ETF price. This can encourage some investors to nibble on a low-expense index portfolio now. You can select a high-quality, broad emerging markets index ETF. This way you will gain exposure at a small part of the cost of traditional types of emerging markets mutual funds. But first, let’s review the basics of this matter and how to start investing in emerging market ETFs.
What Are Emerging Markets ETFs?
Just 20 years ago in the economic world before globalization, Western institutional investors bought Europeana country names in aggressive growth portfolios. Technology has changed investors’ ability to have exciting ideas for the world’s emerging markets.
The decision to buy an emerging markets ETF asks the investor to assume a higher degree of risk, in exchange for larger long-term profits.
An emerging markets ETF is an exchange-traded fund that focuses on stocks of the emerging markets and economies. These include areas such as Asia, Latin America, and Eastern Europe. Also, the ETF uses an underlying market index or indices. Therefore, managers may choose from a range of indices. Most financial managers believe that the emerging markets ETF adds international diversification to the portfolio.
The emerging market ETF is almost always a passively managed portfolio. It may contain stocks from more than one country unless it’s a specific emerging markets country ETF. In addition, the emerging markets ETF may focus on the below.
- A specific market capitalization range;
- High-dividend equities within the emerging markets;
- Funds with higher allocations in specific industry sector.
Think of emerging markets ETFs as part of your investment horizon. In the next section, we discuss on the unique facts of these markets.
5 Facts about the Popular Emerging Market ETF
Western equity market valuations are generous, to say the least. The forward P/E ratio of the S&P 500 is at or close to an all-time high as of this writing. Many defensive stocks, including utility names, have forward names at or above 20. Some growth stocks’ forward P/Es bear no relation to reality. Also many, such as Tesla Motors (TSLA) are currently in triple digits. Here’s the case for acquiring one or more emerging markets ETF upside.
Interest Rate Increases
The U.S. Federal Reserve promises more interest rate increases. Even the most conservative Western portfolios bear interest rate risk because stock dividends and bond yields are historically low. For that reason, emerging market ETFs should have a place in many portfolios. In 2016, rising surges in the emerging stock markets of Brazil and Russia and the frontier markets of Thailand, Peru, and Argentina caught investors’ attention.
Bargain Basement Prices
Commodity investors continue to talk about bargain basement prices in metals, oil, and other materials. Some commodity trading analysts say the world has seen the last of cheap oil from Russia and China. Moody’s rating agency anticipates that commodities materials will edge higher in the near-term. If true, rising commodities prices will benefit the emerging markets.
Popularity in Europe
According to Thomson Reuters’ Lipper Alpha Insight fund flows research, emerging market ETFs are increasing in popularity with European investors. European institutional portfolios also poured more than $2.5 billion into emerging markets debt. Emerging market ETFs are a big winner of new money in the global ETF universe. In addition, positive fund flows show us that investors like the potential of these assets, when compared to Western ones.
The Dangers of China’s Markets
China’s markets stumbled and analysts worried that China’s sneeze would mean serious financial health problems for the U.S. Therefore, more capital fundraising efforts continue to direct money to China’s growing economy.
More Opportunities for Business
Seasoned investors know that the biggest or best opportunities are still available in emerging market economies. So the emerging countries and their economies continue to expand.
Popular Emerging Markets ETFs
A broad-based emerging market ETF is liquid. The underlying isn’t a portfolio of actual stocks, as in a traditional mutual fund. Instead, the ETF underlying is an index (or indices) on the target market.
- IShares MSCI Emerging Markets Minimum Volatility ETF EEMV has the purpose of tracking the MSCI Emerging Markets Index. It has low operating costs of just 0.25 percent, high liquidity (more than 56 M shares outstanding), and exposure to mid to large-capitalization stocks in more than 20 emerging countries. EEMV might be a good choice for your portfolio. iShares MSCI Emerging Markets ETF (EEM) returned more than 16 percent last year.
- Vanguard Emerging Markets ETF VWO follows the FTSE Emerging Index. The index includes mid to large-cap stocks in primary and secondary emerging markets. These countries are Brazil, China, South Africa, and Taiwan. Also, VWO is liquid (more than 1037 M shares outstanding) and it’s actively traded. This said, VWO’s low expense ratio (0.15 percent) is another reason to keep an eye on it.
- Emerging Markets SmallCap Fund DGS mirrors Wisdom Tree Emerging Markets Small Cap Dividend Index. DGS offers exposure to small-cap stocks in the index. These stocks may offer higher growth potential along with increased market risk. Morevoer, the expense ratio is 0.63 percent.
Summing It Up
To start investing in an emerging markets ETF, compare all details carefully. Indeed, worries about political instability in emerging countries are valid. But this can happen in any country on earth. More investors take part in such economies. So, local governments and businesses have greater reasons to offer stability in return.
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