Sunday, January 29, 2006

Emerging Markets for the small guy

While the S&P 500 returned a paltry 4.5% in 2005 the emerging markets were on a tear, Brazil, China, India, Mexico and South Korea returned stellar returns of 20-50% in 2005. And if January is any indication 2006 promises to be another block buster year for these economies that have been growing at 8-9% per year. These markets will prosper for the next 2-3 decades
  • Emerging markets have a large consumer middle class that wants to join the global economy
  • Emerging economies have cheap labor, that makes them attractive destinations for global companies to set up manufacturing and service industries
Now there is no question these returns come with added risk and volatility. Capital markets are still developing, and a lot of regulatory hurdles still exist and transaction costs can eat away at your gains. One easy way for small investors to take part in this exciting part of the investing world is through exchange traded funds also called ETF's.
  • ETF's charge 0.6-0.7% in fees
  • Emerging markets ETF's have been well structured to give appropriate diversification
  • ETF's are traded like stocks
The one disadvantage is that you pay trading commissions just like when you trade stocks, but if you are holding for 3-5 years, which you should they are ideal. The following ETF's will give an investor a greatly diversified portfolio and spectacular returns.
  • EEM ($98.14) - a must own the grand dady of emerging markets has exposure to most emerging markets (South Korea 17%, South Africa 12%, Brazil 11%, Taiwan 11%, China 8%, Mexico 8%, India 5%, Russia 5% etc)
  • FXI ($ 70.11) - an exclusively China ETF, a must own if you want to participate in what will become the worlds largest economy.
  • ILF ($140.48) - Latin America ETF (Brazil 51%, Mexico 36%, Chile 10%, others)
The rest of the ETF's are country specific like: EWZ (Brazil), EWM (Malaysia), EWW (Mexico), EZA (South Africa), EWY (South Korea), EWT (Taiwan)

I recommend that every small investor invest a minimum of 10-15% of their portfolio's in the emerging economies and the best way is probably thru EEM and FXI, an allocation of 10% in EEM and 5% in FXI can supercharge your portfolio.
For more information of these any other ETF's in general:

"Always Low Prices"
Most often than ever markets are efficiently priced, but on occasions some awesome bargains are available to participants. Take a look at WalMart (NYSE : WMT) the stock is wallowing in the bad publicity that the company has been getting, some of it quite legitimate (currently at $45). Meanwhile it gives a 1.3% dividend and the stock has not been so cheap since the early 90's. The fact is WalMart is the world's largest retailer, the largest employer in the US, has established a firm presence in China, Mexico and an aggressive strategy for expansion in new emerging markets. Is one of the fastest growing online retail sites.

The fact is WalMart will and is beginning to clean its act up. A company that has such a large impact on the global economy cannot stay aloof from all the criticism and possible legislation/regulation (aka Maryland). The company recent announced a new environmental initiative for its vendors, has a new health care plan for its workers its appointed a new social impact czar etc. I believe the company can do better - it may actually take more that some of these window dressing activities, possible even a management shake-up to fully awaken the company's conscience.

But the fact remains WMT is a good buy that the market is mispricing, so if you have money you do not need for the next 3 years this "Always Low Price" wont be there for long.
(Disclaimer : I do not own WMT today, but plan to in the next few weeks)