How You Can Keep up with Global Emerging Markets

Doug Fabian
Posted: Jun 27, 2014 12:01 AM
How You Can Keep up with Global Emerging Markets

There are two perspectives that investors may use to assess emerging markets. In the first view, the easy-money policies of central banks are buoying the share prices of publicly traded companies and enhancing the returns for investors in emerging markets. An alternative view is that increasingly wealthy and better-educated populations are driving increased domestic demand and productivity. Both of these perspectives point to a key benefit of investing in emerging markets: they are not highly correlated with investments in developed economies and thereby present a true opportunity for diversification. If you seek diversification in your portfolio, take a look at Vanguard Emerging Markets Stock Index ETF (VWO).

VWO seeks to track, before fees and expenses, the performance of a benchmark index of stocks issued by companies located in emerging-market countries. In addition, VWO offers reduced risk by investing in the various public companies included in the index that it models.

The fund has gained 4.35% this year, recovering from pullbacks in February and March. Its yield is 2.77%. VWO is currently trending well above its 50-day and 200-day moving averages, just as it has been doing since April, as the following chart shows.

The fund is heavily diversified in terms of its holdings. The top 10 holdings make up only 16% of the portfolio. VWO’s top five holdings, in terms of individual stocks, are Taiwan Semiconductor Manufacturing Co. Ltd., 2.8%; Tencent Holdings Ltd., 1.9%; Petroleo Brasileiro SA, 1.7%; China Construction Bank Corp., 1.6%; and China Mobile Ltd., 1.4%.

The fund is more concentrated by sector and country. The top sector holdings are financial services, 27.36%; technology, 13.13%; basic materials, 9.95%; communication services, 9.94%; energy, 9.79%; and consumer defensive, 8.63%. VWO’s top holdings by country are China, 20.7%; Taiwan, 13.8%; Brazil, 13.0%; and India, 10.6%.

The emerging-market story that may ring most true is the one where expanding markets of young people, newly affluent when compared to their parents, are buying goods from the rest of the world and growing domestic markets at home. We see this situation in China, in Vietnam, in Nigeria, in Mexico and throughout the emerging-market world. It is very similar to the American story of the 19th and early 20th centuries. One way to invest in that growth story is through an emerging-market ETF such as Vanguard Emerging Markets Stock Index ETF (VWO).

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful ETF Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an e-mail. You just may see your question answered in a future ETF Talk.

In case you missed it, I encourage you to read my article from last week about how to invest in Brazil, host of the World Cup.

How to Dodge Mutual Fund Fees with ETFs

Every year, mutual fund managers, executives and various other industry personnel gather in Chicago for the Morningstar Investment Conference to share ideas on the state of their industry. The latest conference was held a few weeks ago, and, according to one report, there was a conspicuously absent discussion of what I think is the biggest threat to the mutual fund industry — the rise of exchange-traded funds (ETFs).

The article I’m referring to, which appeared on, was appropriately titled, “Behind Closed Doors, ETFs Are All the Rage.” The piece correctly points out that “the ETF market is the fastest-growing segment in the financial world today, expanding at roughly a 25-percent-a-year pace and now boasting more than $1.85 trillion in assets in the U.S. alone.”

Unfortunately, the mutual fund industry wants to keep that inconvenient truth on the back burner and from you, the investor.

But why do they want to hide the facts? Simple: because the growing popularity of ETFs will almost certainly put the brakes on the mutual-fund-fee gravy train.

You see, when people realize how much of their money is going to pay for those high-priced mutual fund managers, executives and support personnel to go to conferences such as the aforementioned Morningstar gathering, they aren’t going to like it. The mutual fund industry also realizes investors are going to like the fact that they only have to pay a fraction of the cost in fees to own many ETFs that are essentially the same as those high-cost indexed mutual funds.

I suspect that as more and more investors realize the virtues of owning exchange-traded funds over mutual funds, the mutual-fund-fee gravy train will continue to dry up. That is a great thing for you, the individual investor, because the less you pay out in fees, the more money you keep in your pocket — and the bigger you’ll be able to build your ETF nest egg.