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Thursday, May 2, 2013 - 11:30
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Thursday, May 2, 2013 - 11:30

2 Ways To Invest In Emerging Markets With Less Effort And Risk

Thursday, May 2, 2013 - 11:30am

Successful investors are a naturally curious breed, and the search for profit-producing investments 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's economy 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 to emerging markets -- countries like China, Argentina, Brazil, Hungary, Peru, Russia, India and Turkey, to name a few.

According to the International Monetary Fund, 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 years.

Out of this 70%, a full 40% is projected to come from just China and India. It is estimated that the total GDP of emerging markets will overtake that of the developed economies in 2014 -- and that China's purchasing power will surpass that of the United States by 2016.

As you can see, I am very bullish on emerging markets, for a few reasons:

1. China
China is the prime 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 to IMF projections.

2. Politics
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 to note 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 Markets index returned an annualized 16.8%, double the return of the S&P 500 over the same period. This year, however, the index has fallen more than 3% while the S&P 500 soared nearly 10%. This minor correction spells opportunity in my book.

How To Invest In Emerging Markets
The most efficient way to invest into the stock markets of emerging markets is through exchange-traded funds (ETFs). ETFs have done the hard work of building a diversified portfolio of emerging-market stocks. Here's a closer look at my two favorite emerging-market ETFs:

Vanguard FTSE Emerging Markets ETF (NYSE: VWO): This ETF seeks to track the performance of the FTSE Emerging Transition Index in addition to providing exposure to South Korean equities. 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 (NYSE: DEM): This is my favorite ETF in the emerging-markets sector. It seeks to track the price and yield of the WisdomTree Emerging Markets Equity 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 $56.

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 when investing 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 its dividend yield and focus on the most stable companies. Both are technical breakout buy candidates and will provide diversified exposure to emerging markets.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of DEM in one or more of its “real money” portfolios.