Mike Conlon
Senior Instructor
instructor@mywealth.com
****The following article is from our new guest contributer, Hao Jin, CFA of Point Financial Advisor. He will be contributing to the myWealth blog on an on-going basis. Look for his profile later this week.
30 Emerging Markets ETFs: Risk vs. Reward
by Hao Jin, CFA
Returns from emerging markets stocks are highly correlated to those from U.S. stocks. Also, many people believed that those countries’ growth prospects were hardly a secret, and they had been more than priced into stocks. Still, from price/earnings to growth (PEG) ratio point of view (a ratio used to determine a stock's value while taking into account earnings growth, according to Investopedia), emerging countries’ PEG is still better than SPY’s, which is 1.4.
*****Question of the Week! *****
(Take a shot!!….Chance to Win a FREE Currency Trading Course (VALUE: $99.00!!) by Emailing Us your answer no later than Friday 9AM EST and 3 Names will be randomly picked and named as Winners!! (Must be a blog subscriber) Which currency do you think will perform the best in the next 3 months? a) US dollar (USD) b) British Pound (GBP) c) Japanese Yen (JPY) d) Euro (EUR).
From a total of 835 ETFs, I filtered out those ETFs with net assets less than $100 million and average volume less than 100,000. Below are 30 emerging market ETFs, along with their PEG and Price to Cash Flow (CF) ratio.
|
#
|
Fund Name
|
Ticker
|
PEG
|
Price/CF
|
|
1
|
iShares MSCI Emerging Markets Index
|
EEM
|
0.9
|
6.5
|
|
2
|
Vanguard Emerging Markets Stock ETF
|
VWO
|
0.7
|
4.5
|
|
|
||||
|
3
|
iShares MSCI Pacific ex-Japan
|
EPP
|
1.4
|
5.4
|
|
4
|
iShares S&P Latin America 40 Index
|
ILF
|
1.1
|
9.4
|
|
5
|
iShares MSCI All Country Asia ex Jpn
|
AAXJ
|
0.9
|
4.8
|
|
6
|
SPDR S&P Emerging Asia Pacific
|
GMF
|
1.0
|
4.7
|
|
7
|
Claymore/BNY Mellon BRIC ETF
|
EEB
|
0.5
|
4.5
|
|
8
|
iShares MSCI BRIC Index
|
BKF
|
1.0
|
6.0
|
|
9
|
SPDR S&P BRIC 40
|
BIK
|
1.0
|
5.8
|
|
|
||||
|
10
|
iShares MSCI Brazil Index
|
EWZ
|
1.0
|
4.8
|
|
11
|
iShares MSCI Chile Investable Mkt Idx
|
ECH
|
1.4
|
4.6
|
|
12
|
iShares FTSE/Xinhua China 25 Index
|
FXI
|
1.0
|
6.3
|
|
13
|
PowerShares Gldn Dragon China
|
PGJ
|
0.6
|
5.6
|
|
14
|
SPDR S&P China
|
GXC
|
0.9
|
5.9
|
|
15
|
iShares MSCI Hong Kong Index
|
EWH
|
0.8
|
6.3
|
|
16
|
iPath MSCI India Index ETN
|
INP
|
1.0
|
6.5
|
|
17
|
WisdomTree India Earnings
|
EPI
|
0.7
|
6.2
|
|
18
|
PowerShares India
|
PIN
|
1.0
|
7.2
|
|
19
|
iShares MSCI Malaysia Index
|
EWM
|
1.4
|
8.4
|
|
20
|
iShares MSCI Mexico Investable Mkt
|
EWW
|
1.2
|
6.3
|
|
21
|
Market Vectors Russia ETF
|
RSX
|
2.2
|
1.4
|
|
22
|
iShares MSCI South Korea Index
|
EWY
|
0.9
|
4.0
|
|
23
|
iShares MSCI Singapore Index
|
EWS
|
1.5
|
2.1
|
|
24
|
iShares MSCI South Africa Index
|
EZA
|
0.9
|
5.9
|
|
25
|
iShares MSCI Taiwan Index
|
EWT
|
1.6
|
4.0
|
|
26
|
iShares MSCI Turkey Invest Mkt Index
|
TUR
|
0.5
|
0.9
|
|
|
||||
|
27
|
UltraShort MSCI Emerging Mkts
|
EEV
|
|
|
|
28
|
Direxion Daily Emrg Mkts Bull 3X
|
EDC
|
|
|
|
29
|
Short MSCI Emerging Mkts ProShares
|
EUM
|
|
|
|
30
|
UltraShort FTSE/Xinhua China25
|
FXP
|
|
|
Those ETFs can be divided into 4 categories: broad market index, regional/group, individual country and speculative.
Broad Market Index ETFs
Among these 4 categories, it is the safest way to play emerging market. #1 EEM and #2 VWO are the most populate emerging market ETFs. However, they are still more volatile than U.S market. Both EEM and VWO’s beta are 1.3.
The following charts show short term (1-year) and long term (since its inception, April 2003) comparison between SPY and EEM. As you can see, in both periods EEM out- performed SPY.
Short-Term (EEM in blue, SPY in red):
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BLDRS Emerging Markets 50 ADR Index (ADRE) might be another choice, when you decide to swap for tax-loss purpose.
Regional ETFs
If you want to cherry pick certain regions in the world, you can pick from #3 - #9.
Country ETFs
#10-#26 are sorted by country. Most of non-intraday data, such as P/E, growth % and cash flow are updated quarterly. For example, iShares MSCI Turkey Invest Mkt Index (TUR) price has been up around 30% since June 30, 2009. That’s why it might be better to look at real-time data such as 52-week price range. Investors need a strong stomach to handle price swings for individual country ETFs, such as $18 - $51 for TUR within 52 weeks.
Speculative ETFs
#27-#30 are leveraged or short ETFs for you to express your strong feelings about emerging market, whether it is undervalued or overpriced. However, when you are using these weapons of mass destruction, you should be aware that leveraged ETFs had daily tracking objectives, and are not appropriate for long-term buy-and-hold investors. For example, the complaint against EEV, filed by U.S. firm Gilman and Pastor, notes that the fund was designed to track twice the inverse of the MSCI Emerging Markets Index. From Jan. 2, 2008 to Dec. 17, 2008, the MSCI Emerging Markets index fell by 52%, while EEV fell approximately 30%, according to TheStreet.com. In theory, EEV should be UP by 104%.
Conclusion
In Sep/Oct, there are lots of things for concern. Charles Ortel, managing director of Newport Value Partners has coined the term "skew-flation" to describe what's ahead: the "worst of all worlds" is coming, characterized by falling asset prices and higher taxes, accompanied by a rising cost of core goods and services. There's too much productive capacity around the world and not enough demand. At the same time, private sector incomes are down while debt levels are up.
Nonetheless, if you decide to participate in the market, and you slept well when MSCI Emerging Markets index fell over 50% last year, it doesn’t hurt to allocate a small portion of your portfolio to emerging markets, as long as you understand they are 30% more volatile than US market.
High risk, high reward.
To learn more about how to invest in ETFs, please be sure to check out our ETF course.
Disclosure: I have a long position on EEM. All data is from Yahoo Finance as of Sep 13, 2009.
Stocks: AAXJ, ADRE, BIK, BKF, ECH, EDC, EEB, EEM, EEV, EPI, EPP, EUM, EWH, EWM, EWS, EWT, EWW, EWY, EWZ, EZA, FXI, FXP, GMF, GXC, ILF, INP, PGJ, PIN, RSX, SPY, TUR, VWO
