SmartMoney.com News Editor Jack Hough recently appeared on a Wall Street Journal Live segment to talk about some problems with the MSCI Emerging Market Index and hence emerging market funds like the iShares MSCI Emerging Markets Indx ETF (NYSEARCA: EEM) which track the index.
For starters, investors turn to emerging market funds for fast growth and diversification. However, South Korea and Taiwan account for 25.9% of the MSCI Emerging Markets Index and yet its been more than a decade since either has been classified by the IMF as emerging. The problem with markets like South Korea and Taiwan is that they act to much like the US and other developed markets and are not growing as quickly as emerging markets like China or India.
Moreover, the MSCI Emerging Markets Index has a 23.8% allocation in financials, a 14% allocation in energy and a $13.2% allocation in materials – sectors that tend to trade on global prices and are not that linked to local consumers.
Because of these issues, Hough said the fact that emerging market funds have been having a slow performance is not a coincidence as owning an emerging market fund could actually be the same as owing two S&P 500 funds.
Hough then mentioned two ways for investors to fix these problems:
- Take a core and satellite approach where you buy an emerging market fund and then a country specific targeting countries like Thailand and Malaysia in order to play on China or Mexico to play off the fact that the US economy is doing better than Europe’s.
- Look for where companies make their money. In other words, check to see if they are exporting to developed markets or are focused on exporting to emerging markets or servicing a domestic market.
Hough also suggested taking a look at the EGA Emerging Global Shares Trust (NYSEARCA: ECON) which tracks the Dow Jones Emerging Markets Consumer Titans 30 Index that is designed to measure the stock performance of 30 leading emerging market companies in the consumer goods and consumer services industries.
You can also go to the website of WSJ Live to see the video segment, The Problem With Emerging-Markets Funds.
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- Asian Tigers: South Korea and Taiwan (Franklin Templeton)
- Korea & Taiwan Use Renminbi for Majority of Payments with China & Hong Kong (The Asset)
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- Asia at a Crossroads: Demographics, Economics & Investment (State Street)
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- Global Emerging Markets: Country Allocation Review, H1 2021 (Federated Hermes)
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- Powell Pushing Asia Into a New Financial Crisis (Asia Times)
- The Spoils of Trade War: Asia’s Winners and Losers in US-China Clash (SCMP)
- On Growth, Exports and Supply Chain Diversification: Making the Case for South Korean Equities (Franklin Templeton)
- Investors in Emerging Market ETFs Should ‘Look Under the Hood’ (Reuters Video)