Emerging markets first came into focus following the release of a research thesis by Goldman Sachs economist Jim O’Neill titled ‘Dreaming with BRICs: The Path to 2050’. O’Neill argued that 4 emerging markets, viz. Brazil, Russia, India and China will replace the Western bloc and dominate the global economic scene in less than 50 years. The name BRIC caught on and led to an upsurge of investor interest in emerging market equity. Today we shall discuss the structure and performance of emerging markets diversified equity ETFs
Emerging markets in general outperformed developed markets by a wide margin during the last Bull Run. Consequently, asset allocation to emerging markets equity is a permanent part of most investment strategies, including retirement investments like IRA investments and 401K investments. Having said that, emerging markets have an extremely high co-relation with the global economy, and hence they have significantly underperformed most other asset classes. The relative performance of emerging markets diversified equity ETFs vis-à-vis other asset classes is given below.
Major Asset Classes Trend
11/10/2011
| Description | Symbol | 1 Week | 4 Weeks | 13 Weeks | 26 Weeks | 52 Weeks | Trend Score |
| Gold | (GLD) | -0.34% | 5.45% | 0.23% | 16.75% | 24.32% | 9.28% |
| Total US Bonds | (BND) | -0.14% | 1.04% | 1.31% | 4.81% | 5.56% | 2.51% |
| Mortgage Back Bonds | (MBB) | -0.02% | 0.4% | -0.02% | 2.87% | 4.2% | 1.49% |
| US Stocks | (VTI) | -1.82% | 3.43% | 6.13% | -8.2% | 4.9% | 0.89% |
| US High Yield Bonds | (JNK) | -2.16% | 2.11% | 2.44% | -3.16% | 5.12% | 0.87% |
| Emerging Market Stks | (VWO) | -3.53% | 2.75% | -4.08% | -15.95% | -12.73% | -6.71% |
| International Developed Stks | (EFA) | -3.66% | -1.9% | -3.37% | -16.3% | -10.2% | -7.09% |
For more on the performance of various asset classes, see here
Global Stocks Trend
11/10/2011
| Description | Symbol | 1 Week | 4 Weeks | 13 Weeks | 26 Weeks | 52 Weeks | Trend Score |
| India | (INP) | -6.25% | -1.5% | -10.93% | -17.23% | -29.93% | -13.17% |
| France | (EWQ) | -6.12% | -5.77% | -5.86% | -25.75% | -18.17% | -12.33% |
| Germany | (EWG) | -6.03% | -2.28% | -4.19% | -24.66% | -13.4% | -10.11% |
| Switzerland | (EWL) | -5.22% | -3.57% | -7.51% | -17.75% | -5.63% | -7.94% |
| Hong Kong | (EWH) | -3.94% | 1.26% | -4.57% | -14.74% | -17.66% | -7.93% |
| Russia | (RSX) | -2.03% | 8.13% | -4.74% | -20.48% | -15.42% | -6.91% |
| Brazil | (EWZ) | -2.53% | 4.52% | -0.38% | -16.12% | -18.81% | -6.66% |
| Japan | (EWJ) | -1.71% | -3.96% | -6.87% | -11.09% | -9.35% | -6.59% |
| China | (FXI) | -2.84% | 7.81% | -0.08% | -13.99% | -20.45% | -5.91% |
| Canada | (EWC) | -3.8% | 1.79% | -6.05% | -14.19% | -7.26% | -5.9% |
| South Korea | (EWY) | -4.54% | 3.46% | -3.27% | -18.47% | -6.35% | -5.83% |
| South Africa | (EZA) | -3.13% | 2.47% | -1.41% | -9.08% | -8.93% | -4.02% |
| Australia | (EWA) | -2.07% | 1.23% | 1.85% | -11.63% | -4.55% | -3.04% |
| United Kingdom | (EWU) | -2.84% | 1.73% | 3.53% | -8.65% | -3.94% | -2.03% |
For a comprehensive look at international stock trends, see here
From the data in the above-given tables, we can see that emerging market equity has widely underperformed other asset classes in the last financial year. Even among international stocks, large EMs like India, China and Brazil have underperformed the most. This volatility and relative underperformance will is bound to continue till global GDP growth does not improve.
Now let us check out the most prominent and liquid EM diversified equity ETFs traded today.
Emerging Market Diversified Equities
11/04/2011
| Description | Symbol | 1 Yr | 3 Yr | 5 Yr | Avg. Volume(K) | 1 Yr Sharpe |
| iShares MSCI Emerging Markets | (EEM) | -13.68% | 16.27% | 5.28% | 83,272 | -45.67% |
| Vanguard MSCI Emerging Markets | (VWO) | -11.67% | 19.49% | 6.44% | 33,167 | -37.98% |
| Schwab Emerging Markets | (SCHE) | -13.95% | NA | NA | 162 | -50.31% |
| WisdomTree Emerging Markets Equity Income | (DEM) | -6.66% | 19.5% | NA | 501 | -26.59% |
| PoweShares FTSE RAFI Emerging Markets | (PXH) | -14.59% | 16.37% | NA | 196 | -54.49% |
| PowerShares DWA Em Mkts Technical Leaders | (PIE) | -12.59% | 18.52% | NA | 430 | -39.61% |
For more on various asset class ETFs, see here
As we can see, EEM (83,272k avg volume) and VWO (33167k avg volume) are the most liquid and widely held ETFs from the list above. On the other hand, DEM has the best comparative returns, the best Sharpe ratio and a decent average volume of 501k. This makes DEM a good investment candidate. Let us examine the structure and holdings of DEM closely. Top Holdings in WisdomTree Emerging Markets Equity Income Fund As of 11/10/2011
| Name | Weight |
| 1. Taiwan Semiconductor Manufactu | 3.81% |
| 2. Cia de Bebidas das Americas | 2.95% |
| 3. Banco do Brasil SA | 2.82% |
| 4. Banco Santander Brasil SA/Braz | 2.43% |
| 5. Malayan Banking Bhd | 2.32% |
| 6. Kumba Iron Ore Ltd | 2.31% |
| 7. Chunghwa Telecom Co Ltd | 2.15% |
| 8. Bank of China Ltd | 1.94% |
| 9. Turk Telekomunikasyon AS | 1.85% |
| 10. CEZ AS | 1.77% |
Emerging Markets Equity Income - Sector Breakdown
| Sector | Weight |
| 1. Financials | 25.60% |
| 2. Telecommunication Services | 21.52% |
| 3. Information Technology | 12.87% |
| 4. Materials | 9.87% |
| 5. Utilities | 9.79% |
| 6. Consumer Staples | 6.91% |
| 7. Industrials | 5.02% |
| 8. Energy | 4.21% |
| 9. Consumer Discretionary | 3.58% |
Country Allocation
| Country | Weight |
| 1. Taiwan | 21.28% |
| 2. Brazil | 19.97% |
| 3. South Africa | 8.95% |
| 4. Malaysia | 8.91% |
| 5. Chile | 5.11% |
| 6. South Korea | 4.22% |
| 7. Israel | 4.18% |
| 8. Turkey | 3.81% |
| 9. Thailand | 3.66% |
| 10. Czech Republic | 3.45% |
| 11. Mexico | 3.02% |
| 12. China | 2.81% |
| 13. Poland | 2.43% |
| 14. Philippines | 2.28% |
| 15. Argentina | 2.05% |
| 16. Indonesia | 2.00% |
| 17. Russia | 1.19% |
| 18. Hungary | 0.32% |
Examining the data posted above, we can see that DEM has a good mix of export-based economies (Taiwan, Brazil, Russia, China and South Korea) and consumption based economies (South Africa, Indonesia, Malaysia, Israel and Turkey). The sector break down shows a bias towards aggressive high growth sectors like Financials (25.6%), Telecom (21.52%) and IT (12.87%) which are still at a nascent stage in the above mentioned countries and have a lot of room to grow. Similarly, the top ten holdings include world leaders like Taiwan Semiconductor Corp., Chunghwa Telecom Co Ltd and Bank of China Ltd. All these companies are monopolies in their own right and will derive maximum benefit from future GDP growth.
In conclusion, the current price volatility and underperformance of emerging market diversified equity ETFs like DEM should be used as an opportunity to invest for the long-term (15-20 years). If you can afford to ignore notional short-term losses or underperformance then EM diversified equity ETFs like DEM can prove to be a potential goldmine in the long term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
