What’s an Emerging Market Anyway?

The talk around the water cooler lately has been to invest internationally especially in emerging markets.   What does emerging mean anyway?  Webster’s dictionary describes emerging as “newly created or noticed and growing in strength or popularity, becoming widely known or established.”   Sounds good to me but what does it have to do with investing?  Plenty.

Most investors will invest in established or developed markets like the United States, United Kingdom, Germany, Japan, Australia or Canada.   Established markets have several things in common like contract law, stable governments, and a modern infrastructure.   The citizens of these countries reap the benefits of a modern society by spending their wealth on fine dining, big screen TVs, huge homes and expensive cars.   Clean water and (mostly) affordable health care is available to all.

Emerging markets are defined by the BRIC’s: Brazil, Russia, India and China.  Other countries include Peru, Thailand, South Africa, Chile, and Turkey.  These markets typically have unstable governments, poor infrastructure and impoverished citizens.

I’ve had the good fortune to travel to a few emerging markets like Hungary, Haiti, Nicaragua and parts of Mexico.   In Haiti, the poverty is inconceivable.   The corruption in the government has stripped the land bare and left its citizens in misery.   The homes, roads and cars are in despair.  It will be centuries before Haiti is an emerging market, unfortunately.

Why should you invest in an emerging market?  A good reason is because they’re emerging.   They’re growing.  The rise of the middle class is giving these people access to things we take for granted like jobs, microwaves, washers and dryers, and iPhones.   It’s also giving them hope.  The advancement of technology is making our world smaller and richer.   As these markets begin to prosper so, too, will their citizens.

How much should you allocate to an emerging market portfolio?  I’d recommend a 5% to 10% allocation.   Here are three popular index funds you should consider for your portfolio.

  • Dimensional Funds Emerging Markets Portfolio (DFEMX). Year to date this fund is up 17.91%.
  • Vanguard FTSE Emerging Markets Index Fund (VWO). Year to date this fund is up is up 12.94%.
  • IShares MSCI Emerging Markets ETF (EEM). Year to date this fund is up 14.42%.

The 2017 returns for these funds are stellar and outperforming the Standard & Poor’s 500 index.  However, emerging markets carry risks.   The volatility for emerging markets is high.   The standard deviation for emerging markets is 28.7 by comparison the developed markets have a standard deviation of 17.4 a 65% difference![1]   In 1998, the Turkey market returned 252% while the Russian market lost 83%.   Last year Brazil was up 67% and Egypt was down 11.4%.[2]    The divergence in returns from year to year is vast and therefore an allocation of 5% to 10% makes sense for most investors.

As you construct your portfolio add a pinch of emerging markets.   The allocation could give your portfolio a boost.

It’s a small world, but I wouldn’t want to paint it. ~ Steven Wright.

Bill Parrott is the President and CEO of Parrott Wealth Management and is a fan of global diversification.   For more information on financial planning and investment management, please visit www.parrottwealth.com.

Note:  Your results may differ than those listed in this blog.  This is not a recommendation to buy or sell the securities listed in this blog.

 

 

[1]Morningstar Office 2017 Market Assumptions.

[2] Dimensional Funds 2017 Matrix Book

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