A Broad Play on the Strength of Emerging Markets

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker, financial journalist, and money manager.

The Vanguard Emerging Markets ETF (VWO), a huge, $66.7 billion exchange-traded fund (ETF), offers one of the broadest and possibly best-known ways to play the continued rise of emerging markets this year.

The age-old problem of problem in selling investors on emerging markets is that of risk. After all, emerging markets, by definition, are countries that cannot quite be considered fully developed, modern nations. The four largest “emerging” economies in the world are the BRIC countries — Brazil, Russia, India and China. These are hardly stable investments.

However, while emerging markets are volatile, the old saying “nothing ventured, nothing gained” comes to mind here. If investors can get over their fear of taking risk, there are some solid arguments out there in favor of emerging markets.

For instance, in terms of price/earnings (P/E) ratios, emerging markets are more attractive than in the developed world. According to recent research, forward P/E ratings for emerging markets is 12.5, whereas the United States rings in at a hefty 18.1. At that number, the U.S. has a higher P/E ranking than Japan and the United Kingdom, both of which are considered developed economies.

Additionally, emerging markets and international equities have seen impressive returns this year, breaking the bad cycle of the last few years. VWO is a perfect example of this. As a broad fund covering over 4,700 stocks, and with a year-to-date return of 27.22%, it is clear that emerging market stocks are doing strongly.

VWO is pegged to a benchmark index that measures the returns of certain companies located in non-specific emerging markets. As such, VWO provides market-cap-weighted exposure to equities from over 20 emerging market countries. This widespread investment strategy also means that VWO is more stable than single-country funds and mitigates much of the risk that investors face when investing in emerging markets.

From the graph below, you can see that VWO has continued to rise in 2017, and has barely even touched its 50-day moving average line. The fund has an expense ratio of just 0.15% and a dividend yield of 2.3%.

VWO has roughly half of its portfolio in financials and technology and has holdings in many Chinese companies. The top 10 holdings comprise 18.28% of the portfolio and include: Tencent Holdings Ltd., 4.59%; U.S. Dollar, 2.15%; Taiwan Semiconductor, 2.13%; Naspers Ltd. Class N, 1.99%; and China Construction Bank Corporation Class H, 1.53%.

Investors looking for a broad play on emerging markets that comes with a minimum of risk might find the Vanguard Emerging Markets ETF (VWO) to be a good choice.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

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