Emerging Markets ETFs: Turnaround Plays

09/02/2013 8:00 am EST


George Putnam

Editor, The Turnaround Letter

Emerging markets, which were on everyone's must own list not long ago, have performed poorly over the last couple of years, says George Putnam, editor of The Turnaround Letter. For contrarians, he highlights some diversified emerging markets ETFs.

Some people fear that rising interest rates will slow global growth, and that will have the most pronounced impact on the developing countries.

A related fear is that the apparent slowdown in China will drag down, not only that country's securities, but the stocks in many other emerging markets as well.

In addition, the weakness in commodities prices will hurt many of the developing countries, whose economies depend heavily on the natural resources sector. Added to all of these, are worries about social unrest in a number of areas of the globe.

All of these concerns are valid, but they are short-term. When you take a longer-term view, it seems clear that the developing economies will provide the lion's share of global growth in the decades to come.

The emerging markets also provide an interesting way to play a possible rebound in commodities.

Of course, the emerging markets are not without risks. The negative short-term views may persist for some time. And it remains difficult to pick the ultimate winners, either in terms of countries, or even more so, in terms of companies.

For these reasons, we recommend investing in the emerging markets through diversified pools, such as exchange traded funds. We've highlighted several ETFs below, all offering substantial size and liquidity.

Vanguard FTSE Emerging Markets (VWO) focuses on, in descending order of size, China, Brazil, Taiwan, and South Africa.

The fund has a high level of diversification. Its largest holding, China Construction Bank Corp., accounts for only 1.6% of assets. The nearly 4% yield provides a nice buffer while awaiting the turnaround.

WisdomTree Emerging Markets Equity (DEM) takes a somewhat different approach because it focuses quite heavily on dividend yield.

As a result, the fund has an attractive 4.2% yield. Financial services is the fund's largest sector exposure, followed by energy, basic materials, and communications.

Morgan Stanley Emerging Markets Fund (MSF) is not an index-based fund, and therefore, its portfolio managers have a lot of latitude.

Among their top ten holdings are a range of consumer and technology holdings, such as Samsung Electronics and Taiwan Semiconductor, as well as financials. At current prices, the fund is trading at a roughly 10.5% discount to its net asset value (NAV).

Templeton Emerging Markets Fund (EMF) is also actively managed. Currently, the fund is Asian-centric with about 71% of assets from Asian markets, mostly China and Thailand.

Latin America is second, mostly Brazil, followed by Europe, mostly Russia. The fund is trading at more than a 7% discount to NAV.

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