Divergence is Another Word for Opportunity

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.
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Divergence is Another Word for Opportunity

When I look at the strong gains in the domestic equity market over the past year, I tend to feel a bit ambivalent. On the one hand, this market has proven resilient to threats of all kinds, and has continued to march higher in the face of a lot of adversity. On the other hand, if I am considering putting more money to work here, I certainly don’t want to do it with the S&P 500 trading at new all-time highs.

During the past 12 months, the S&P 500 is up nearly 24%. That’s a trend that, while certainly rewarding for investors, isn’t likely to continue at its current pace. The chart below shows the big move higher in $SPX during the past year.


The story has been one of divergence for stocks in the emerging markets. The iShares MSCI Emerging Markets (EEM) actually has declined slightly during the past year. The chart here of EEM stands in stark contrast to the power move higher made in $SPX during the past 12 months.


Yet the divergence here between domestic stocks and emerging market stocks is, I suspect, an opportunity to buy a great value proposition in EEM. In fact, I am of the opinion that emerging markets, Asia and other global equities actually represent a better long-term value than stocks here in the United States.

Yes, we’ve seen a strong year for domestic equities; there is no denying that. But considering how far these stocks have run in 2013, I think the chances of money continuing to pour into the sector are far less than the prospects that capital will seek value in the relatively beaten-up emerging markets.

So, if you are looking to put new money to work in stocks, consider the value proposition that this divergence has created, and consider investing outside U.S. borders.

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The ETF Innovation Revolution

The universe of U.S.-based ETF offerings is big and getting bigger all the time. At last count, there were more than 1,500 ETFs, with over $1.64 trillion dollars in assets. That total doesn’t even include international-based funds. So far this year, there has been approximately $168 billion that has flowed into ETFs. And while the total amount of assets in ETFs still is only a fraction of the amount of assets invested in mutual funds (mutual funds hold about $10 trillion), the trend definitely is moving toward ETFs.

I’ve been a big fan of ETFs for many years, and I have been advocating their use in my advisory services for much of the past decade. And while we haven’t abandoned mutual funds altogether, especially for those who have limited choice in a 401(k)-style investment plan, certainly the trend of ETF industry expansion is one that’s taking the investment business by storm.

According to the research my team and I have conducted, there have been more than 150 new ETF offerings through the first 10 months of the year. That’s a very big number, and it speaks to the growing demand and the increasing popularity of ETFs among not only individual investors, but also from institutional investors.

Now, in terms of innovation, there are several fund issuers doing some incredible things. But which firms are doing some of the most interesting things in the ETF industry? To find out, I invite you to check out Successful Investing.

In fact, in our next issue, we cover in detail three fund companies breaking new ground with creative offerings, and with active management that can give you the edge on the market. Find out how.

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Ben (Not Bernanke) on What We Do

“It’s not what we do, it’s what we do with what we feel.”
Ben Harper, “Don’t Give Up On Me Now”

The innovative singer/songwriter Ben Harper is known for his diverse musical explorations into various genres. He’s also a brilliant lyricist, and here he shows us why with a line reminding us all that what really matters is acting on our deepest passions. If you do that, you’ll likely be one step closer to happiness.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Don’t hesitate to ask Doug.

In case you missed it, read my e-letter from last week, And the Easy Money Keeps on Rolling. I also invite you to comment about my column in the space provided below.

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