Using ETFs to Tackle Emerging Markets

06/14/2011 4:04 pm EST

Focus: ETFS

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and

One of the toughest obstacles when investing in emerging markets is the physical difficulty of buying into the truly profitable plays from home. But ETFs can bridge that gap, says Doug Fabian of the Making Money Alert in this exclusive interview with

I’m speaking with Doug Fabian about investing in ETFs. A big area that investors are looking at right now is emerging markets. Doug, what do you think about those?

I’m really encouraging investors to start increasing their allocation to emerging markets.

Now, obviously, emerging markets are a growth play within your portfolio. If you’re looking for income, these are not the investment vehicles to approach an income portfolio. It’s a pure growth play.

The idea here is that emerging-market economies have much greater opportunity for growth than developed markets. One of the things I was surprised about in my research is that emerging markets are much healthier from a demographic standpoint. They have a younger population. A country like Japan has an aging population, so that’s going to create challenges for Japan—social safety net, that kind of thing.

Speaking of social safety nets, there are no social safety nets in emerging markets. Now, that creates a situation where there isn't a burden—a debt burden, a liability burden—like here in the United States, where we have Medicare and Social Security. They don’t have that in China. They don’t have that in Brazil.

Again, that’s less of a drag on the overall economy, and creates more of an opportunity for growth. What people have to realize is how to invest in these, and now it’s very easy with exchange traded funds. There are over 100 emerging-market ETFs available.

The next point I wanted to make in regard to emerging markets: some emerging markets are natural resource-based, some are manufacturing-based, and some are technology-based. Right now the technology-based countries—Taiwan, Singapore, South Korea—are all just about to go to new highs, while China and Brazil are actually breaking their 200-day moving averages because everybody is worried about a slowdown in China and the like.

So, the idea here is you’ve got to get more of your portfolio in emerging markets. Some emerging markets are correcting. I think that’s going to be a buying opportunity, and ETFs are just a great way to be able to approach it.

When you talk about having some part of your portfolio in emerging markets, is there a percentage of your portfolio that you would think is good?

Most people have got their toes stuck in the water...maybe they’ve got 10%. I’m suggesting that you get more toward 30% to a third of your growth allocation toward emerging markets. It’s just going to be a better opportunity.

I may increase that over time, if we're under a scenario where we have a slowdown or very slow economic growth—especially post-2013, in the United States, when some of the tax laws change again. I think emerging markets could continue to power right along.

Emerging markets, you talked about some of them. Do you like Latin America as well? And is Brazil really an emerging market still?

Well, it still is, and that’s still how it’s classified. I do like Brazil, but it is natural resources-based, and we’re in a natural resource correction.

Now, there is an ETF that is just Brazil infrastructure stocks (BRXX). Brazil is going to be hosting the Olympics and the World Cup. I was in Rio, and the traffic there is a disaster. They need infrastructure so badly. I think this is going to be a great play. I think it’s going to be a longer-term play—three to five years.

So, a good investing idea, good vehicle in ETFs. Those things come together, we're going to make some money.

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