ETF Talk: Emerging Markets Showing Signs of Recovery

Doug Fabian

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

Amid the financial crisis in Europe and ongoing global uncertainty, an emerging market exchange-traded fund (ETF) may be a contrarian investment worth considering. The Vanguard MSCI Emerging Markets ETF (VWO) provides an opportunity to invest in non-European emerging markets, which could prove enticing in the face of the current European crisis.

After beginning the year at $39.33, the fund has fluctuated fairly significantly, falling as low as $36.94 during intraday trading on June 4. In the past several weeks, though, the fund has risen and closed trading at $39.99 on June 19. As a result, VWO is up 1.68%, year-to-date. In addition to remaining relatively inexpensive due to a pullback in its share price during May and early June, the fund currently has an expense ratio of .20%, which Vanguard touts as 88% lower than the average expense ratio of funds with similar holdings.

The Vanguard MSCI Emerging Markets ETF (VWO) invests in companies of emerging markets located in countries such as China, Taiwan and Brazil. The fund specifically invests its assets in the common stocks included in the MSCI Emerging Markets Index, which holds emerging markets stocks around the world.

As of May 31, VWO’s top ten holdings were: Samsung Electronics Co Ltd (SSNLF); Petroleo Brasileiro SA (PBRF.EX); Taiwan Semiconductor Manufacturing CO, Ltd (TSM); China Mobile Ltd (CHL); Vale SA (VALE); China Construction Bank Corp. (0939.HK); Gazprom OAO (OGZPY); America Movil SAB de CV (AMX); Industrial & Commercial Bank of China (1398.HK); and Hyundai Motor Co. (005380.KS).

The fund is somewhat geographically concentrated. At the end of May, the countries that held the majority of the ETF’s assets were: China, 18.6%; Korea, 15.4%; Brazil, 13.5%; Taiwan, 11.2%; and South Africa, 8.0%.

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If the fund continues to rebound, VWO could present a significant investment opportunity. It currently trades at a slight discount to its net asset value (NAV) of $46.70 per share. However, the fund carries a higher risk than many others, since it invests in emerging markets that tend to be more volatile than the most developed markets. As a result, the fund has the potential to decline quickly. If you’re like me, you tend to be wary of funds with high risk factors, unless the potential returns justify making the trade.

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my ETF Trader service. As always, I am happy to answer your questions about ETFs, so do not hesitate to email me by clicking here. You may see your question answered in a future ETF Talk.


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