Gold is not the only former darling that has fallen out of favor recently. Emerging market securities, which were on everyone's "must own" list not long ago, have performed poorly over the last couple of years. After peaking in mid-2011, the MSCI Emerging Market Index has been on a bumpy downward trajectory culminating in a loss of 9.6% so far in 2013.
Some people fear that rising interest rates will slow global growth and that will have the most pronounced impact on the developing countries. A related fear is that the apparent slowdown in China will drag down not only that country's securities but the stocks in many other emerging markets as well. In addition, the weakness in commodities prices will hurt many of the developing countries whose economies depend heavily on the natural resources sector. Added to all of these are worries about social unrest in a number of areas of the globe.
All of these concerns are valid, but they are short-term. When you take a longer-term view, it seems clear that the developing economies will provide the lion's share of global growth in the decades to come. The emerging markets also provide an interesting way to play a possible rebound in commodities.
Of course, the emerging markets are not without risks. The negative short-term views may persist for some time. And it remains difficult to pick the ultimate winners, either in terms of countries or, even more so, in terms of companies. For these reasons, I recommend investing in the emerging markets through diversified pools in the form of exchange traded funds and open and closed-end mutual funds. In the most recent issue of my Turnaround Letter, I highlighted several such funds that offer substantial size and liquidity. Four exchange-traded fund options are detailed here and additional ETFs and closed and open-end funds can be found at TurnaroundLetter.com.
iShares China Large-Cap (FXI) is based on the FTSE China 25 Index, with the result that it targets the largest and most liquid Chinese shares. More than half of its holdings are financial stocks, with the next third split between telecommunications and energy. Despite recent short-term concerns about China, there is little question that the country has vast potential for long-term growth.
iShares MSCI Brazil Capped (EWZ) seeks to replicate the performance of the MSCI Brazil 25/50 Index. Financials and consumer staples account for just over 75% of the portfolio. Brazil has recently experienced some political upheaval, but the government appears to have been responsive. Brazil's hosting of the FIFA World Cup in 2014 and the Summer Olympics in 2016 will generate significant investment in infrastructure.
Market Vectors Russia Index (RSX), as the name suggests, concentrates on the Russian market, which tends to be quite volatile. Some of this volatility comes from the country's dependence on oil and gas exports. Similarly, the fund typically has 40% or more of its assets in energy stocks with another 15-20% in other basic materials. While its market may be volatile, Russia is likely to remain a major force in the global economy.
PowerShares India Portfolio (PIN). India has had its share of concerns recently, but the economy is growing pretty well, and unlike many other developing markets, it is generally benefiting from the decline in natural resource prices. The PowerShares fund has about 24% of its holdings in energy, followed by 21% in technology and 14% in financial services. India may seem chaotic to an outsider, but it is gradually winding its way to becoming a world power.
Emerging Markets: A Boost to Long-Term Returns?
Net Asset Mil.
iShares China Large-Cap
iShares MSCI Brazil Capped
Market Vectors Russia