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Tuesday, September 23, 2014

Does It Even Make Sense to Speak About Emerging Markets As an "Asset Class"

I certainly think it is important to be invested globally and certainly in parts of the world that are considered "emerging markets".

But within the category there are important distinctions: simply investing in an emerging markets overall index like IEMG is far different than being selective among emerging markets.

For example here is the country allocation in IEMG
as of 19-Sep-2014













Many analysts have written about the fragile five" countries  most exposed to impact of higher US interest rates because of their high dependent on outside investments and their current account deficits. The fragile 5 are Turkey, Brazil, India, South Africa and Indonesia. As can be seen above these make up a bit under 30% of the above ETF. Additionally Russia carries a high degree of political risk.

Another term which is now recognized as having little usefulness is BRIC (Brazil,Russia, India and China) clearly those economies actually have little in common nor do they share many factors that would impact stock prices. They can be purchased in an ETF BRK.

Then there is the major regional division. Eastern Europe, Latin America and Emerging Asia.

The Emerging  Eastern Europe ETF (ESR) is 65% allocated to Russia and 25% to Poland. Obviously it has high exposure to the political risks associated with investing in Russia. And 25% of the asset allocation is in two Russian oil companies Gazprom and other words not a very diversified portfolio.

Emerging Latin America (EEML) is also very concentrated in country allocation: 56% to Brazil and 26% to Mexico.

The third major country sector within emerging markets is emerging Asia. Below are the country weightings for GMF and Emerging Asia ETF.

Fund Country Weights

As of 09/22/2014
Hong Kong0.81%
United States0.36%

With the large divergence in the factors impacting the holdings in the above ETFs it shouldnt be surprsing that they have increasingly had large differences in perfomance. Additionally investors might note that emerging markets do still have many billions of dollars that allocate with emerging markets as an asset class. That could lead potentially for opportunities for those looking to invest in particular geographic sectors either to buy or sell in rebalancing during periods where large money flows into or out of emerging markets as a group moving them all in tandem despite the large differences.

Below are 1 one year and 5 year charts for the ETFs mentioned above the line charts show growth of $100,000 the bar charts performance (top) and volatility below that. Color codes are the same on all graphs.

Interestingly over the one year period GMF produced the highest returns at the lowest volatility. Over the 5 year period GMF returned 40% with a volatility of 20.9 a far better risk reward tradeoff than iemg which had a higher  volatility than  iemg  (20.9 vs 15.6) but its return over the period was 40.4% vs 10% a very attractive return vs risk .

1 Year

One Year Returns (top) and Volatility (below)

One Year Growth of $100,00

Five Year

Returns (top) Volatility (bottom)
Growth of $100,00

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