Time To Shift From U.S. Stocks To Emerging Market ETFs?

Includes: EEM, EWZ, FXI
by: Tom Lydon

After the impressive run in the domestic markets, advisors and investors are beginning to shift more money into emerging market equities and exchange traded funds.

Northern Trust's chief investment strategist, Jim McDonald, has argued for easing up on U.S. stocks and moving capital into emerging-market equities, reports Jonathan Cheng for The Wall Street Journal.

The fund manager has raised his allocation of emerging market assets to 11% from 7%, while lowering his exposure to U.S. stocks and corporate debt.

"There are times to take money out of trades that have worked well, and this is one of those times," McDonald said in the article.

Other market observers have also been making this move in light of central bank moves and the extra liquidity sloshing around.

"Risk aversion has come down, and that's definitely a positive for the emerging markets," John Praveen, chief investment strategist for Prudential International Investment Advisers, said in the article.

Year-to-date, investors have funneled $23 billion into emerging market stock funds, with $9 billion added since August. In the week ended Oct. 19, the iShares MSCI Emerging Markets Fund (NYSEARCA:EEM) added $1 billion in assets, the iShares FTSE China 25 Fund (NYSEARCA:FXI) saw $662.7 million in new inflows, and the iShares MSCI Brazil Fund (NYSEARCA:EWZ) accumulated $489.3 million, according to IndexUniverse.

Nevertheless, naysayers contend that it could still be too early for the emerging markets. For instance, John Higgins, senior markets economist for Capital Economics, said that investors should sit out at least another year and wait for Europe to sort out its problems.

Additionally, some have pointed to the emerging market stock P/E ratios, which are sitting around 13 times earnings, compared to U.S. shares at 14.8 times earnings, according to MSCI.

"We still don't think it's compelling enough," said Christian Thwaites, president and chief executive of Sentinel Investments.

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.