Emerging Markets Worth A Trip

5/29/2017


Developing markets have woken from a lengthy slumber.

So far in 2017, the MSCI Emerging Markets Index has returned 17.1%, versus 8.0% for the S&P 500 Index. If the lead holds, it will be the first outperformance since 2012. Provided you can stomach volatility, having some exposure to emerging markets makes sense.

------------- Total Return -------------
MSCI
Emerging
Markets
(%)
MSCI
EAFE
(%)
S&P
500
(%)
Year-to-date
17.1
14.1
8.0
1 year
30.3
19.4
19.6
5 years (ann.)
4.8
10.0
15.1
10 years (ann.)
2.3
1.1
6.9

The case for emerging markets — and foreign stocks in general — rests in large part on their reasonable valuations, particularly compared to U.S. stocks. At only 14 times trailing earnings, the MSCI Emerging Markets Index trades at a hefty discount to the P/E of 21 for the S&P 500. The popular MSCI EAFE Index, which tracks mature foreign markets, has a P/E of 18.

In addition, emerging markets are benefiting from healthy global trade, favorable trends in commodity prices, and expectations for solid economic growth. Developing economies are projected to grow 4.5% this year and 4.8% in 2018, up from 4.1% last year, according to the International Monetary Fund. In contrast, the U.S. economy is expected to grow 2.3% this year and 2.5% in 2018, up from 1.6%.

To be sure, emerging markets are characterized by volatility, reflecting political, economic, and currency-related risks. Based on calendar-year returns, the MSCI Emerging Markets Index has tumbled at least 10% six times since 1997, compared to three times for the S&P 500. In 2008, emerging-market stocks plunged 53%, versus a decline of 37% for U.S. stocks.

Mutual funds and exchange-traded funds (ETFs) are the best way to play emerging markets, in our view. Adding one or two funds in limited amounts to a well-rounded portfolio could boost performance and improve diversification. Listed in the table below are nine funds with solid track records and reasonable expense ratios. Three are broadly diversified, four focus on particular regions, and two invest in China or India.

Thrifty investors seeking broad exposure should consider Vanguard FTSE Emerging Markets ($41; VWO). Investing in more than 4,500 stocks across 23 countries, the ETF has 28% in China and 12% in India. The fund, with a tiny 0.14% expense ratio, holds large stakes in financials (26% of assets) and technology (19%). Shares have rallied 13.8% this year.

EMERGING-MARKET FUNDS WORTH WATCHING
-------- Total Return --------
5-Year
Standard
Deviation
(%)
-- % Of Assets In --
Fund (Price; Ticker)
YTD
(%)
3-Yr.
(Ann.)
(%)
5-Yr.
(Ann.)
(%)
Est.
Yield
(%)
Exp.
Ratio
(%)
Total
Holdings
10 Largest
Holdings
Brazil,
China,
& India
Fund
Score
Fidelity Pacific Basin ($31; FPBFX)
16.7
8.1
13.9
12.5
0.6
1.19
128
20
18
100
iShares MSCI BRIC ($37; BKF)
16.4
1.7
3.9
18.4
1.6
0.72
303
34
91
92
iShares MSCI Emerging Markets 
($41; EEM)
17.8
0.6
4.1
15.4
1.7
0.72
847
24
43
44
iShares MSCI India Small-Cap
($42; SMIN)
30.1
12.7
17.3
26.3
1.7
0.80
254
12
99
100
SPDR S&P China ($87; GXC)
20.8
8.4
9.5
19.1
1.8
0.59
349
47
99
88
SPDR S&P Emerging Asia Pacific
($90; GMF)
19.3
6.2
8.7
14.2
2.1
0.49
738
26
62
100
T. Rowe Price Emerging Mkts.
($38; PRMSX)
19.5
4.4
6.5
15.4
0.4
1.26
92
35
42
98
T. Rowe Price Latin America
($22; PRLAX)
13.7
(3.7)
(1.1)
22.5
1.2
1.38
56
51
59
64
Vanguard FTSE Emerging Mkts.
  ($41; VWO)
13.8
0.9
4.2
15.5
2.3
0.14
4,526
17
49
76

 

 


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