Emerging Market Exposure For Your Portfolio

| About: iShares Core (IEMG)
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Summary

I recently reviewed the Seeking Alpha ETF Investing Guide and decided to implement it for a portion of my portfolio.

This article reviews iShares Core MSCI Emerging Markets ETF (IEMG), the fifth ETF in the core portfolio of Seeking Alpha’s ETF Investing Guide.

IEMG is a good ETF for the emerging market portion of most investor’s Core ETF portfolio. Several other good options are also discussed.

The Seeking Alpha ETF Investing Guide

I recently reviewed the Seeking Alpha Investing Guide and decided to allocate part of my portfolio to a core portfolio of ETFs, similar to that suggested by the guide. I do not intend to completely switch course from my current allocation but to set up a separate core portfolio of ETFs and to allocate a majority of my investments to this Core ETF portfolio over time.

After reviewing the investing guide, I drafted a procedure for implementing the suggestions of the guide. Currently I am reviewing each of the suggested ETFs to determine which to buy. This article focuses on the emerging market portion of the Core ETF portfolio and the iShares Core MSCI Emerging Markets ETF (NYSEARCA:IEMG).

iShares Core MSCI Emerging Markets ETF - Investment Synopsis

The iShares Core MSCI Emerging Markets ETF seeks to track the investment results of an index composed of large, mid and small-capitalization emerging market equities. IEMG provides low cost, comprehensive access to a broad range of stocks in emerging market countries. IEMG can be used at the core of an investor's portfolio to diversify internationally and seek long-term growth.

Performance of emerging markets compared to the S&P 500 since 2003

Source: Yahoo Finance (2/1/2016)

The chart above shows that over the last 13 years (the longest data series I could find for emerging markets in Yahoo Finance) emerging markets (represented by the iShares MSCI Emerging Markets ETF (EEM), the blue line) is up 157%, while the S&P 500 (the red line) is up 96%.

Performance of IEMG compared to the S&P 500 over the last 5 years

Source: Yahoo Finance (2/1/2016)

Over the last five years, IEMG (the green line) is down 23%, while EEM is down 27% and the S&P is up 37%.

When setting up a Core ETF portfolio and making an initial allocation, an investor may want to consider how long they believe the emerging market underperformance of the last five plus years will continue. Depending on their conviction, they may want to under or over-weight this sector.

Top 10 holdings

Source: iShares by BlackRock (as of 12/31/2015)

IEMG's top ten holdings make up approximately 16% of total holdings. Because the MSCI Emerging Markets Investable Market Index uses a market-cap weighting structure, the larger companies have a larger weighting.

Equity sector diversification

Source: iShares by BlackRock (as of 12/31/2015)

IEMG's largest stock holdings are in the financial sector. Investors setting up a core portfolio of ETFs will probably want to reduce their holdings of individual stocks, particularly in sectors where both the ETF and the investor are heavily invested.

Country Breakdown

Source: iShares by BlackRock (as of 2/2/2016)

IEMG is most heavily weighted to China, followed by South Korea and Taiwan. China and Taiwan together make up almost 38% of total holdings, which might be a concern for some investors.

ETFs in the emerging market category

Symbol

Fund Name

AUM ($MM)

Expense Ratio

VWO

Vanguard FTSE Emerging Markets ETF

31,236M

0.15%

EEM

iShares MSCI Emerging Markets ETF

18,362M

0.69%

IEMG

iShares Core MSCI Emerging Markets ETF

9,137M

0.16%

EEMV

iShares MSCI Emerging Markets Minimum Volatility ETF

2,644M

0.25%

SCHE

Schwab Emerging Markets ETF

1,387M

0.14%

DEM

WisdomTree Emerging Markets Equity Income ETF

1,199M

0.63%

DGS

WisdomTree Emerging Markets SmallCap Dividend ETF

804M

0.63%

GEM

Goldman Sachs ActiveBeta Emerging Markets Equity ETF

558M

0.45%

FM

iShares MSCI Frontier 100 Index ETF

414M

0.79%

GMF

SPDR S&P Emerging Asia Pacific ETF

348M

0.49%

Source: Seeking Alpha (as of 2/1/2016)

Above is a list of the top 10 emerging market ETFs, listed by assets under management (AUM). As the table shows, IEMG is the third largest emerging market ETF by AUM and there are two ETFs in the sector with lower expense ratios, discussed further below. For those that want to do further research, additional detail on these ETFs is available on Seeking Alpha's ETF Hub.

Expenses and dividend yield

IEMG's expense ratio is 0.16%, this is well below the average expense ratio of similar funds. Of the top ten emerging market ETFs listed above, only the Vanguard FTSE Emerging Markets ETF and the Schwab Emerging Markets ETF have lower expense ratios.

Given the relatively high price of the global equity markets today, it is likely that future returns may be lower than those recently experienced. In this environment, it is important that the core of your portfolio is allocated to funds with low expense ratios.

IEMG's SEC yield is approximately 2.49%.

Conclusion

I believe IEMG is a good ETF for the emerging market portion of an investor's Core ETF portfolio. VWO and SCHE are also good choices and may be used to rotate into for the emerging market portion of an investor's core portfolio, when tax loss selling. Although emerging markets have recently sold off, there are some legitimate near-term concerns for these markets. Dollar cost averaging a new investment into IEMG is probably a good idea. After reviewing the other ETFs in the core ETF portfolio, I expect to move a portion of my portfolio, currently allocated to individual emerging market stocks and ETF's, to either IEMG, VWO (which I already own) or SCHE.

Addendum

Seeking Alpha's Investment Guide Core ETF Portfolio

ETF Ticker

Fund Name

Fund Description

Expense Ratio

VOO

Vanguard S&P 500 ETF

Large cap US stocks

0.05%

IJH

iShares Core S&P Mid Cap ETF

Mid cap US stocks

0.12%

VTWO

Vanguard Russell 2000 ETF

Small cap US stocks

0.15%

IEFA

iShares Core MSCI EAFE ETF

Multi cap foreign developed market stocks

0.12%

IEMG

iShares Core MSCI Emerging Markets ETF

Multi cap emerging market stocks

0.18%

LQD

iShares iBoxx $ Investment Grade Corporate Bond ETF

US investment grade corporate bonds

0.15%

PLW

PowerShares 1-30 Laddered Treasury Portfolio ETF

US Treasuries

0.25%

SCHP

Schwab U.S. TIPS ETF

US TIPS

0.07%

VNQ

Vanguard REIT Index ETF

US REITs

0.10%

DBC

PowerShares DB Commodity Index Tracking ETF

Broad commodities

0.85%

Simply Investing - Philosophy

Establishing a core portfolio in well-diversified, low expense ETFs, held for the long term, is a good idea for most all investors. The core of a small portfolio can start off as simple as one well diversified global ETF with a low expense ratio, like Vanguard Total World Stock ETF (NYSEARCA:VT). Typically, as the portfolio grows, the core of the portfolio would include exposure to the ten asset classes listed above.

There are four steps needed to set up an efficient investment plan. The decisions and actions required to set up the plan and purchase the ETFs can be done in about 4 hours (see the further reading section below for more details):

  1. Decide on an asset allocation plan among the ETFs in the core portfolio.
  2. Open an online brokerage account with a linked online bank account.
  3. Determine if you will invest all your investment funds at once or over a period of time.
  4. Determine which investments to buy in your taxable and tax deferred accounts.

The core ETF portfolio outlined above, after tax, should significantly outperform either individual stock picking or a portfolio managed by a financial advisor. Over the typical investors time horizon of 40+ years the expected advantage of this core ETF portfolio is staggering.

Investors that enjoy the investment analysis process and are willing to spend the time to analyze and invest in individual stocks or sectors can still do this. I believe, the majority of these investors should still set up a core ETF portfolio, but can allocate a small, fixed percentage of their portfolio to "edge" positions, which offer additional risk and opportunity.

Further reading

ETF Investing Guide - Written by Seeking Alpha's Founder in 2006 is a great guide for setting up a portfolio of ETFs.

Set Up A Core ETF Portfolio Now - Describes the four steps required to implement the suggestions in the ETF Investing Guide. The ETF Investing Guide is made up of 54 articles and takes some time to read and assimilate the information. This article condenses the information from the guide down to four steps that can be completed to set up a core ETF portfolio in around four hours.

Disclosure: I am/we are long VT, VWO, EEM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.