Over the past several weeks, U.S. stock indexes declined broadly, including several daily losses of over 4%. As has been the case for several years, emerging markets stocks experienced heightened volatility, declining even more than their US counterparts.
Through the close of business on August 23, 2011, US stocks as measured by the SPDR S&P 500 ETF (NYSEARCA:SPY) are down 14.23% from their April 29, 2011 peak. Over that same period, emerging markets stocks as measured by the iShares MSCI Emerging Markets Index Fund (NYSEARCA:EEM) declined 17.11%. For investors able to keep emotions in check, such volatility serves to unearth attractive investment opportunities.
Specifically, the WisdomTree Emerging Markets Equity Income Fund (NYSEARCA:DEM), that features a distribution yield of 6.79% as reported by its website on August 24. Assuming a $100,000 investment within an IRA (to eliminate the effect of taxes) and provided a stable annual distribution of $6,790 directed to non-yielding cash, the fund would only have to provide a compound annual growth rate of 2.82% in the form of capital appreciation to double the investment over a 10 year period. As 2.82% is less than any accepted rate of inflation and thus the rate at which financial results naturally increase over time, an investor can reasonably expect to at least double their money even absent economic growth.
CAGR = (($200,000 - $67,900)/($100,000))^(1/10) -1 = 2.82%
However, given the enormous untapped consumer bases in China, India, and much of Latin America, as well as very manageable sovereign and household debt levels, a positive growth rate over the next 10 years seems a most reasonable expectation. Accordingly, a disciplined investment in the WisdomTree Emerging Markets Equity Income Fund with a 10 year horizon should provide a very attractive rate of return.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.