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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| archerETF Metrix | VWO |
|---|---|
| Category | EM Markets |
| Benchmark | MSCI Emerging Markets |
| Total Holdings | 900 |
| 52 Week High | $50.37 |
| Recent Price | $49.24 |
| 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 |
| Annual Volatility | 39.83% |
| 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.
