Join Fund Library now and get free access to personalized features to help you manage your investments.
In a recent column on diversification, I mentioned adding a position in emerging markets (EM) if an investor wanted broader global exposure.
That comment elicited a few responses including one from a reader that consisted of a string of “ha, ha, ha’s.” Not exactly a well-reasoned answer, but it made his point. No EMs in his portfolio!
Is he right? Several years ago, EMs were regarded as the future of investing. China was going to replace the U.S. in terms of global economic dominance. Brazil and India were on the rise. Russia, back before President Putin opted for empire-building over GDP growth, was attracting more foreign capital. Emerging markets funds became a standard component in portfolio building. Now they elicit laughter. How the mighty have fallen.
But things may be changing. The iShares MSCI Emerging Markets ETF (NYSE: EEM) is up 19% from its 52-week low of US$33.49, touched last October. Given that 30% of its portfolio is in China, which has been slow to recover from the pandemic setback, that’s not a bad performance.
When you look at the fund’s results in recent years, they appear discouraging. The 5-year average annual compound rate of return to June 30 was 0.32%. But that was largely due to a loss of over 22% in 2022. The fund’s average annual return since its inception in 2003 is a respectable 8.39%, and it has gained 7.67% year-to-date.
As with the rest of the world, emerging markets were hit hard by the sudden and rapid rise in interest rates as central banks took drastic action to fight inflation. That battle isn’t over, but the banks have slowed their pace.
In a recent analysis of the prospects for emerging markets going forward, Lazard concluded: “We believe that emerging markets may be one of the most mispriced asset classes, with valuations reaching some of their most attractive levels ever…Barring a major global recession, emerging markets are likely to enter a period of economic recovery beginning in the latter half of 2023.”
The International Monetary Fund expects growth in emerging markets of 4% this year and 4.3% in 2024. In contrast, growth in developed markets is forecast to be 1.2% this year and 1.4% next year.
One emerging market to watch closely is India, which has overtaken China as the world’s most populous country. We have an ETF on my Internet Wealth Builder recommended list that tracks stocks in that country. Here’s an update.
BMO MSCI India ESG Leaders Index ETF (TSX: ZID) tracks the MSCI India ESG Leaders Index, which in turn is based on the MSCI India Index of mid- and large-cap stocks. The index aims to capture the performance of securities that have been assigned higher ESG ratings by MSCI relative to their peers. It excludes securities of companies that earn significant revenues from tobacco, alcohol, gambling, conventional weapons, and civilian firearms, any controversial weapons, significant generation of nuclear power, as well as companies involved in severe business controversies.
Launched in January 2010, the fund has $97.5 million in assets under management. The management expense ratio (MER) is 0.67%. It held up quite well in 2022, losing only 4.43%. It’s down 0.43% so far in 2023 (to June 30), but it’s been gaining traction in recent weeks. The 10-year average annual compound rate of return is a healthy 13.71%. The market price is up about 70% since the first recommendation in my newsletter.
The portfolio consists of 41 stocks, weighted by market capitalization. The largest positions are in Reliance Industries (20.1%) and Infosys (11.4%), which together make up almost a third of the portfolio. The largest sector holdings are information technology (22.9%), financials (17.9%), and energy (20.1%).
Distributions are made annually, and they are normally negligible. In December 2022 investors received a cash payment of $0.11 per unit. Of that, most was received as foreign income, which is fully taxed in a non-registered account.
BMO’s risk rating on this ETF is medium to high.
The International Monetary Fund expects India to grow by 5.9% in fiscal 2023-24 and by an average rate of 6.1% over the next five years. That’s a lot less than China at its peak, but much faster than the projections for North America. The fund stood its ground in a terrible year for global equities. It should do better going forward.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website. To take advantage of a 50% saving on a trial subscription and receive the special report “The Tumultuous Twenties,” go to https://bit.ly/bwGP20s.
Follow Gordon Pape on Twitter at https://twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2023 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
Join Fund Library now and get free access to personalized features to help you manage your investments.
Fund Library
