Emerging market equities have finally dug back to the surface from under the rubble of the 2008 crisis. Experienced diggers (recall 1998), they made rapid progress. EM equities climbed 76% in 2009 and 20% in 2010. From November 2010, however, the pace slowed under the burden of expensive commodities and tighter money supply. Then, a renewed rally since mid-March has brought them back to end-2007 levels. Softening - in both commodity prices and central banks' attitudes - helped.
Where to from here? We are cautiously bullish. There are negatives: high inflation; inverted yield curves; an expected drop in US liquidity once QE2 ends in June.
But there are more positives. A sustained US recovery – it looks likely – will help EM companies. The 3- and 5-year returns on EM equities are far below their average. At the end of 2007, the 3-year return on EM equities was 135% and overdue for a correction. In 2007, EM valuations – a P/E of about 20x – were the highest of all. Now EM P/E is at about 13.5x, in line with the S&P 500 and below the TSX 60.
For our core, strategic EM holding, we use Vanguard's VWO, a US ETF holding 900 firms well dispersed across various markets. VWO's assets have tripled in four months, helped by its low fee of 0.22% - just one third of the fee on iShares EEM, its nearest competitor.
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|Benchmark||MSCI Emerging Markets|
|52 Week High||$50.37|
|52 Week Low||$35.80|
|Avg Daily Volume||22.19 Million Shrs|
|Avg Daily Volume ($)||$1.09 Billion|
|Total Market Cap||$62.60 Billion|
|ETF Annual Fee||0.22%|
|ETF Trading Currency||USD|
|ETF FX Exposure||Various|
|Correlation to S&P 500||88.43%|
|Return to Risk Ratio||132.26%|
|Use of Leverage||No|
|Use of Futures||No|
|6 month Return||7.02%|
|1 Year Return||14.64%|
|2 Year Return||88.80%|
|3 Year Return||8.12%|
|Dividend Yield (TTM)||1.66%|
Disclosure: I am long VWO.