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Will Emerging Markets become this Year's Winners?

Will Emerging Markets become this Year’s Winners?
Ron DeLegge, Editor
April 8, 2009

SAN DIEGO (ETFguide.com) – The first quarter is in the history books. Pockets of market strength have already begun to manifest themselves. Are you too busy running for cover or are you paying attention?

One of last year’s worst performers has become this year’s best. What is it? Emerging markets stocks.

Despite the gloomy world economy, the fundamentals of emerging markets look positive. Emerging market economies are growing at a faster rate than developed countries. Also, emerging economies aren’t hampered by the multi-billion and multi-trillion dollar government deficits currently experienced by their larger counterparts. 


All well-built portfolios should have exposure to emerging markets stocks, preferably through a low cost index fund or index ETF. This allows you to get the market’s performance without the risk of style drift, fund manager turnover, and surprise tax liabilities.

Let’s consider a few investment strategies for investing in emerging markets.

Single Country Approach
Single country ETFs offer convenient equity exposure to specific countries. Instead of attempting to select individual stocks from China or India, for example, you could opt for a Chinese ETF (NYSEArca: FXI) or an India ETF (NYSEArca: EPI) that owns a group of stocks from that specific country.

A closer look at country ETFs will show too that certain emerging economies are often industry sector plays. For example, Taiwan (NYSEArca: EWT) has long relied on the U.S. technology sector for its business. Russian stocks (NYSEArca: RSX) are largely impacted by the price of oil. African stocks (NYSEArca: AFK) and Brazilian stocks (NYSEArca: EWZ) are highly intertwined with commodity prices like coffee, metals and oil. The same phenomenon can be found in other single country ETFs which are acutely affected by the goods and services produced in their nations.

The SPDRs S&P BRIC 40 ETF (NYSEArca: BIK) is a popular choice for investors that want to capture the performance of the four largest emerging economies on the planet: Brazil, Russia, India, and China. The foursome is also referred to as the “BRIC” nations.

Among the best performing single country ETFs year-to-date are EWZ, up by 19.89%, Chile (NYSEArca: ECH) up by 17.04%, and EWT, up by 12.91%*.

Geographic or Regional Approach
For less aggressive investors, a lower risk way to invest in emerging markets is through ETFs that focus on specific regions of the world. There are many ETFs that meet this criterion, let’s look at a few key ones.

The iShares S&P Latin America 40 (NYSEArca: ILF) focuses on stocks from Argentina, Brazil, Chile and Mexico. The SPDR S&P Emerging Europe (NYSEArca: GUR) owns stocks from the Czech Republic, Hungary, Poland, Russia, and Turkey. The SPDR S&P Emerging Middle East & Africa (NYSEArca: GAF) owns stocks from Egypt, Israel, Jordan, Morocco, Nigeria, and South Africa. For market exposure to the Pacific basin, Vanguard manages the Asia Pacific (NYSEArca: VPL), which contains equities from Australia, Japan, Hong Kong, and Singapore.

Broadly Diversified Approach
The easiest way to invest in emerging markets is through a broadly diverse ETF that owns the entire market. Many investors and financial professionals have gone this route to avoid the extreme market moves associated with individual countries or regions.

An excellent candidate for this area is the Vanguard Emerging Markets ETF (NYSEArca: VWO), which has risen 7.04% since the beginning of the year. VWO covers the equity markets of key emerging countries like Brazil, Chile, China, Israel, India, Indonesia, Korea, Malaysia, Mexico, South Africa, Taiwan, Thailand, and Turkey. This particular Vanguard ETF follows a similar investment strategy as the much larger iShares Emerging Markets Index Fund (NYSEArca: EEM), but it charges annual expenses almost three times less.

One More Thing...
The argument in favor of investing in emerging markets is typically made, with good reason, for broader stock or bond diversification. However, another overlooked benefit of investing overseas is for currency diversification.

In a recent radio interview on the Index Investing Show, Tom Anderson Head of Strategy and Research Group at State Street Global Advisors said, “All of State Street’s SPDR family of international ETFs are denominated in foreign currency and in fact most international ETFs give you foreign currency exposure.” As a result, investing internationally buffers investors from weakness in the U.S. dollar.

Also keep in mind that not all internationally focused funds offer unhedged currency exposure because some mutual fund managers will hedge against currency exposure. In contrast, international and emerging markets ETFs do not.

Which emerging markets funds will emerge from today’s financial wreckage as winners? Is your portfolio positioned to profit from the mega-trends at hand? Learn more from ETFguide’s ETF Profit Strategy Newsletter.  
 

*All YTD performance figures quoted through 4/7/09 market close

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