We all went to rev up our investment returns, but without having to invest in an emerging market with lax regulations and a government that changes by military coup whenever there is nothing better to do. Fortunately, there are other options.
If you are seeking global alpha, exchange-traded funds (ETFs), indexes and ADRs can provide a safer way to invest in international markets. ETFs and index funds offer well-diversified funds to smooth out volatility in foreign investments. ADRs can provide exposure to foreign stocks listed on US exchanges with the added safety of US exchange regulations.
Investment for Emerging Markets: Exchange-traded Funds
Exchange-traded funds are funds that act like stocks and trade on stock exchanges. Many track indexes (more on indexes below). An EFT like a mutual fund typically holds a basket of securities, such as stocks, bonds, and commodities. Unlike a mutual fund, investors can see changes to the fund allocation daily. Mutual funds typically disclose changes to their funds once a quarter.
Related: Difference Between Exchange Traded Funds and Mutual Funds?
ETFs may look like mutual funds but they have the qualities of a stock. Advantages are ease of trading and transparency. Investors can trade in and out of ETFS daily for a small fee, similar to stocks. Prices are transparent and can be followed throughout the trading day. The cost of an ETF can be one-third that of a mutual fund. They also have a lower tax cost.
Investors who took advantage of the broad diversification of many ETFs did better in emerging market investments following the Chinese stock crash. Many emerging market funds saw their performance decline with the recent declines in the Chinese market. A peak in at the performance of US-traded emerging market ETFs shows the aftermath of the recent declines in Asian stocks.
One exception is Russian ETFs. The Market Vectors Russia ETF, for instance, is up 13.94% year to date. So why look at these dogs of the ETFs this year? You may be more interested in looking at iShares Core US Growth ETF, which is up 8.69% on the year. It is made up of large US growth stocks – Apple, Alphabet, Facebook, Amazon, Microsoft, and so on.
As a famous investor once said, he made a lot more money from studying his losers than his winners. If we take another look at our list, the ETFs that have the smallest losses were the best diversified and insulated against the recent rout in Asian stocks. iShares Asia 50 ETF was only down 3.89%, versus double digits for most of its competitors. The fund’s strategy is to invest in leading companies across Asia, replicating the S&P Asia 50 Index – safe stocks in emerging markets. It may be a good time to pick up some undervalued emerging market ETFs, but play it safe!
Investment for Emerging Markets: Indexes
Many ETFs track major indexes, another form of mutual fund. An index fund tracks a market index, such as the S&P 500. Investors gain broad diversified exposure to markets for a low fee, since you do not have to cover the cost of active portfolio managers trading in and out of stocks. The benefits of broad market exposure through an index is evident in the returns of the two iShares ETFs we just looked at. The iShares Core US Growth ETF is having a good year tracking the Russell 3000 Growth Index.
Some investment themes have held up well in the recent downturn. Many of the Asia 50 stocks are focused on providing internets services, providing access to the internet, or selling on the internet. Not surprisingly, a few emerging market e-commerce funds eked out a small gain this year. Socially responsible investing is another interesting investment theme.
As consumers exercise their green buying power, it may even become a bear market-proof sector. A leader in responsible investment funds, Calvert has just launched a Calvert Developed Markets Ex-US Responsible Index Fund (CDHAX), and a fund that will track the index. Alternative energy, renewable energy and clean technology are all potential global plays along the same theme. The S&P Global Clean Energy Index has only dipped 4% this year and is up 15.52% over three years.
Investment for Emerging Markets: ADRs
American depository receipts (ADRs) are stocks of non-US companies that trade on American exchanges. Stocks trading on US exchanges cannot protect you from bad performance. But because these stocks have to meet US security regulations and accounting rules, they are deemed safer investments. Many investors seeking to add some global growth potential to their portfolios choose to buy ADRs. Since most major Asian brokers provide access to major US exchanges, ADRs are accessible to Asian investors. A depository receipt (DR) is a security that trades on a market other than its home market where it was initially listed.
Chinese ADRs have seen the highest demand. Over 100 Chinese ADRs are listed on US exchanges. A US listing does not provide insulation from global market turmoil, though. E-commerce giants Alibaba (ADR: BABA) and Dang Dang (ADR: DANG) are down more than 20% this year while the Shanghai Composite Index has recovered much quicker and is up 12.5%.
When things get rough, it is always nice to be closer to home and on familiar terrain. You can take comfort in knowing that ADRs have to meet strict securities and accounting requirements to list on US exchanges. So when Dang Dang’s stock price crashes with the overall market, and not because of problems with its underlying business, you can feel safer holding on. DANG’s stock price is steadily recovering and its three-year return is 18%.
You do not have to place your money in a foreign locale to get some global market upside. Global and international funds may be your lowest risk option. These funds will provide a balance among developed and developing market securities. A mix of stocks and bonds is also good. Conventionally, stocks and bonds have been negatively correlated. If you are globetrotting for returns, ETFs and index funds can give you a risk management advantage through broad diversification at a low cost.Recommend0 recommendationsPublished in