Back in the day, when Italics Man was nothing but a glimmer of my imagination, I did a series of articles answering y’all’s DEEP PRESSING QUESTIONS about how to invest in certain emerging market countries with potential. Or I did it for the SEO. Both of these reasons are equally important.
Here are some of them. Feel free to LOL at the Turkey one, since that’s turned out to be a goddamned disaster.
One criticism I never got but a lot of you probably voiced silently in your heads was the risk of investing in a single emerging market. Russia and Turkey had crazy guy in charge risks, which will always make foreign investment in a country dangerous. Sure, you and I buying some random ETF aren’t really making a direct investment, but the result ends up the same if the crazy guy stops giving preferential treatment to foreigners doing business in a country.
Then there’s the additional risk of investors simultaneously hating all emerging market stocks, something that comes around every 5-10 years. All of a sudden investors wake up to the fact that nations like Brazil and China aren’t all sunshine, lollipops and blowjobs. This bearishness lasts anywhere from a few months to a year, then things recover, and everyone lives happily ever after again.
Let’s take a closer look at a couple of emerging market ETFs that I’m considering buying.
I sure am committing to this joke, huh?
Why does a guy with a dividend investing site need to buy an emerging markets ETF? Why not buy the stocks directly? Or buy Canadian stocks with emerging market exposure?
This is an actual great point, Italics Man. I still hate your face, though.
I don’t have a face, moron.
First off, I did buy a couple of stocks that have emerging markets exposure. They’re Bank of Nova Scotia (which has a bunch of assets in Central and South America) and Polaris Infrastructure, which owns a geothermal power plant in Nicaragua. I have a few others on my watchlist, too, like some of the airport operators. Airports are a fantastic business.
Most of the emerging markets stocks in Canada are gold miners or oil producers with assets in some far-flung nation. I try to avoid all resource stocks now, so buying them is out of the question. There are many more that trade on the NYSE, but it’s much more difficult to research these. I know the banking sector in Canada intimately. I couldn’t tell you much about the sector in Chile.
In short, it’s just easier to get my exposure via ETFs. And since most emerging markets have been whacked, I don’t have to pick individual ones. I can start nibbling at broad indexes covering vast portions of the earth.
Like the Vanguard FTSE Emerging Markets ETF (TSX:VEE), which is down nearly 4% in the last month and is only up a little more than 1% over the last year. It has a management expense ratio of just 0.23% and it pays a nice dividend of approximately 2%.
The bad news? It’s a China-heavy fund. Nearly 35% of assets are invested in China with an additional 14% invested in Taiwan. It’s almost like a single-country ETF in disguise.
The iShares Core MSCI Emerging Markets ETF (TSX:XEC) only has 28% China exposure, and Taiwan’s share of assets is 12%. It also has a decent portion of its assets invested in South Korea. It charges a slightly higher management fee (0.28%) and offers a dividend yield of approximately 1%.
The Fund I’d Choose
The main problem with most of these emerging markets ETFs is they’re cap weighted. This means they own most of the largest companies. These companies are mostly Chinese. Hence, we get a large amount of exposure to China.
The Schwab Fundamental Emerging Markets ETF (NYSE:FNDE) might be the best solution. It still has about 20% of its assets in China, which is a much more reasonable number. It pays a 2.8% trailing dividend and the portfolio as a whole seems to be pretty fairly valued. Morningstar says the portfolio trades at approximately 8x forward earnings and slightly under book value. Finally, it’s a large ETF with more than 300,000 shares trading hands daily. Those are the kinds of metrics I like to see.
The only real downfall? It trades in U.S. Dollars. There’s a cost to doing that conversion for Canadian investors.
I know the whole point of ETFs is to avoid the bias of picking certain stocks or countries, but China gives me ulcers. There is a lot of stuff to worry about. If China continues to show weakness, the Schwab fund should outperform its peers. And if China keeps on trucking, FNDE will still go along for the ride.