Emerging Markets Investing: Protect Yourself From Downside

Includes: EEM, VNT
by: Tom Lydon

Emerging markets focused exchange traded funds may feel the effects of Venezuelan president Hugo Chavez nationalizing the Compania Anonima Nacional Telefonos de Venezuela (VNT). As a result, shares of VNT dropped 10% last Monday, and 27% by Tuesday, reports Roger Nusbaum on TheStreet.com.

This occurrence is a good example of the risks involved with emerging market stocks and funds. As a rule, there should be no more false security in a stock just because it is listed on the NYSE. The easiest thing an investor can do is not buy into a theme too much. Remember, a stock is never safe from risk, and with foreign investment, whatever happens in that country puts the investor at even more risk. To play it safe, Nusbaum suggests a 2% weight and then trim back if it goes significantly.

The most popular emerging markets ETF, iShares MSCI Emerging Markets Index (NYSEARCA:EEM), is only 20% invested in emerging markets stocks and not one is a Venezuelan company.