Successful investors are a naturally curious breed, and the
search for profit-producinginvestments can be a great outlet for
high curiosity levels.
Unfortunately, many investors are stymied by a one-track
mindset, often because of past success in a particular area. For
instance, I know several investors who invest only in American
companies. They've had success with this single-minded view, but
the ever-changing nature of the world'seconomy means they're
leaving tremendous opportunities on the table.
Fear of the unknown is commonly what keeps investors doing the
same thing over and over again despite their natural curiosity.
This is particularly true when it comes toemerging markets --
countries like China, Argentina, Brazil, Hungary, Peru, Russia,
India and Turkey, to name a few.
According to the International MonetaryFund , emerging markets
are expected to grow two to three times faster than developed
economies like the United States. If this isn't enough to whet
your appetite, consider that 70% of the world's economic growth
is expected to come from emerging markets over the next several
Out of this 70%, a full 40% is projected to come from just
China and India. It is estimated that the totalGDP of emerging
marketswill overtake that of the developed economies in 2014 --
and that China'spurchasing power will surpass that of the United
States by 2016.
As you can see, I am verybullish on emerging markets, for a
China is theprime driver of emerging-market growth. Despite the
feared economic slowdown, the country is still reporting an
astounding 7.5% growth rate. Any other country would be jumping
for joy with this rate, but expectations for China are so high,
it seems anticlimactic. China is now morphing from a
manufacturing and exporting economy to a consumer-based economy.
China will produce a current account surplus of $450 billion or
more into 2016, according toIMF projections.
Governments in China and other emerging markets are slowly
warming to the idea of free enterprise. This sea change will be
slow because entrenched political beliefs are difficult to
change. However, the change has begun, and once consumers and
businesses in those countries get a taste of economic freedom,
there will be no turning back.
3. The Pullback
I will be the first tonote that expectations for emerging markets
are sky-high in the minds of many investors. I can't say I blame
them: During the past decade, the MSCI Emerging Marketsindex
returned an annualized 16.8%, double the return of the S&P
500 over the same period. Thisyear , however, the index has
fallen more than 3% while the S&P 500 soared nearly 10%. This
minorcorrection spells opportunity in my book.
How To Invest In Emerging Markets
The most efficient way to invest into thestock markets of
emerging markets is through exchange-tradedfunds (
). ETFs have done the hard work of building a diversified
portfolio of emerging-marketstocks . Here's a closer look at my
two favorite emerging-market ETFs:
Vanguard FTSE Emerging MarketsETF (
This ETF seeks to track the performance of the FTSE Emerging
Transition Index in addition to providing exposure to South
Koreanequities . The chart clearly shows the downtrend triggered
by Chinese growth worries, the price bottom and bounce higher. I
like this ETF on a breakout close above $43.50.
WisdomTree FTSE Emerging Markets ETF (
This is my favorite ETF in the emerging-markets sector. It seeks
to track the price andyield of the WisdomTree Emerging
MarketsEquity Income Index. This index, which is built upon the
highest-dividend stocks in the emerging markets, boasts a
12-month yield of 3.31%.
Technically, this ETF looks similar to Vanguard's. You can see
the Chinese fear selling, the price bottom and bounce. As with
the previous ETF, I like this one as a momentum play above
Risks to Consider:
Make no mistake about it, emerging markets are risky.
Although there is high reward within the risk, these markets are
subject to free-market principles taking hold. While progress has
been made, in this regard, the winds of change could easily
reverse. Use only a small percentage of your portfolio
wheninvesting in emerging markets, as the sector remains
speculative despite the historic performance.
Action to Take -->
Of these two emerging-market ETFs, I prefer the WisdomTree ETF
for itsdividend yield and focus on the most stable companies.
Both are technical breakout buy candidates and will provide
diversified exposure to emerging markets.