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:


Anonymous Anonymous said...

The Vanguard Emerging Markets VIPERs (Symbol: VWO) covers the same market as EEM and has substantially lower expense ratio. (VWO: 0.30%, EEM 0.75%)

9:49 AM  
Anonymous Anonymous said...

just want to add:
I am not in any way affiliated with or sponsored by Vanguard.

9:52 AM  

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