Emerging markets have been devastating for investors this year. Countries like Brazil and China have forcibly taken heavy blows as of late, and most recently, the Shanghai Composite was off over 5.3%, which spilled over into the U.S. equity markets early Monday morning.
But when thinking about stepping into an asset as a buyer, you never want to try and catch the falling knife. Sure, a few times you get lucky and have a strong rally right after you bought (or close to where you bought), but I think that emerging markets can have an important place for any investor's long-term portfolio.
You always want to diversify, at least to a point. While there is such a thing as over-diversification, it certainly serves its purpose. For instance, you would never own all restaurant stocks or all automobile stocks. That would be foolish. While U.S. equities have been doing tremendously well, emerging markets have offered us a window to dip our toes.
Emerging markets allow long-term investors to broaden their portfolio's horizons. While you could be specific and only invest in certain countries, broad-based ETFs can allow for global allocation with exposure to some of the smaller economies of the world. You would never want to invest all in one country (such as Brazil or Turkey), and then witness political unrest there, killing their stock market. Below are two emerging market ETFs that we should at least check out and have on our watchlist:
iShares MSCI Emerging Markets ETF (EEM)
- Monday Closing Price: $36.65
- Year-To-Date Performance: -17.4%
- 1-Month Performance: -13.33%
- Yield: 1.99%
- Expense Ratio: 0.69%
- Average 90-Day Volume: 66.32 Million
Top Five Holdings:
1. Samsung Electronics (OTC:SSNLF) 4.05%
2. Taiwan Semiconductor (TSM) 2.41%
3. China Mobile (CHL) 1.71%
4. China Construction (OTCPK:CICHY) 1.57%
5. Industrial & Commer (OTCPK:IDCBF) 1.24%
Vanguard FTSE Emerging Markets ETF (VWO)
- Monday Closing Price: $36.50
- Year-To-Date Performance: -18.03%
- 1-Month Performance: -14.79%
- Yield: 5.54%
- Expense Ratio: 0.18%
- Average 90-Day Volume: 19.095 Million
Top Five Holdings:
1. China Construction 1.64%
2. China Mobile 1.53%
3. Industrial and Commer 1.40%
4. Taiwan Semiconductor 1.36%
5. Samsung Electronics 1.35%
As you can see -- and have probably heard if you watch any form of business television -- the emerging markets have gotten slammed in the past month or so. While these ETFs are down ~17% and ~18% on the year, most of those losses have came in the previous four weeks, with the EEM losing 13.33% and the VWO losing 14.79%, respectively. For perspective, the S&P 500 (SPY) has vastly outperformed the two emerging market ETFs. Despite sliding nearly 5% lower over the past five trading sessions and over 7% off the highs made in late-May, the ETF is still up over 10% on the year. That's a huge outperformance compared to the haircut emerging markets have taken.
Adding to it, the Dow Jones Industrial Average (DIA) has had a similar outperformance. The ETF is up over 12% year-to-date and is only down 5.7% from the May highs. Consequently, the PowerShares QQQ Trust (QQQ) is only up 7% since January -- most of which can likely be attributed to Apple (AAPL), which is down about 25% year-to-date and still makes up over 12% of the fund's holdings.
Both funds also made new 52-week lows on Monday, June 24th, making this a true knife-catching scenario. That is, unless you're a long-term investor. Chances are that emerging markets aren't going to be wiped off the face of the earth. If they are, then we have a lot more problems to worry about than our investment in the EEM or the VWO.
I think that the recent weakness presents long-term, opportunistic investors a chance to diversify their portfolios with a little international exposure from some of the smaller economies around the world. Although it has underperformed the EEM year-to-date, the VWO offers a much lower expense ratio, while also having a much higher yield.