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3 Tips For Investing In Emerging Markets

By Tim Maverick Having been a neglected asset class for some time, emerging market stocks are enjoying a healthy rebound so far in 2016. The story of how we got here is a familiar one. When developing stock markets got overbought, they became overvalued. As a result, nervous investors – mainly from the United States – dumped those assets. But the selloff led to a sharp 180-degree turn – emerging markets then traded at a 28% discount to developed countries. Research Affiliates, founded by noted investor Rob Arnott, explains that emerging market stocks have only been cheaper than current levels six times. Each of those periods sparked an average five-year return of 188%. That should grab any investor’s attention. So what’s the best way to invest in emerging stock markets? Based on my decades of experience as both an advisor and an investor, I’ve compiled three quick tips to help you make sense of this market trend . Tip #1: Do NOT Use Index Funds I’m not a fan of index funds in general… but especially when it comes to emerging markets. It’s a sure-fire way to be unsuccessful. Why, you ask? First, because indices severely restrict your investable universe. And they’re usually restricted to the most overbought and overvalued stocks. Case in point: The Institute of International Finance points out that only $7.5 trillion out of a total of $24.7 trillion in emerging market equities are covered by indices from MSCI and JPMorgan (NYSE: JPM ). The rest are simply ignored as if they don’t exist. Yet, it’s those ignored stocks that usually boast the best bargains and room for growth. Tip #2: Avoid The Closet Index Trackers Even if you do avoid index funds directly, there’s another problem: “Closet trackers.” These are fund managers who like playing it safe. They couldn’t care less about outperforming the benchmark index for their shareholders. These managers have at least 50% of their funds in index stocks, so their funds will mimic the underlying index. Needless to say, that’s not what you want. Worryingly, a study from the World Bank revealed that 20% of equity funds were index trackers or closet trackers. This is a complete waste of money from an investor’s viewpoint. You’re paying for active management, but you’re not getting it. One example of a mutual fund company that usually goes off the beaten track and often invests in smaller companies is the Wasatch Core Growth Fund No Load (MUTF: WGROX ). Though I do not own their emerging market fund, I do own their frontier markets fund – Wasatch Frontier Emerging SmallCountries Fund (MUTF: WAFMX ) – for exposure to the smaller frontier markets. Please note: The fund is closed to new investors if you try buying it through your brokerage, but if you go directly to the fund company, it’s still open. Tip #3: Get Local Exposure If you truly want exposure to developing markets, guess what? You’ll need to own shares in local companies. And while it may seem like a clearer route to a profit, don’t do what many U.S. advisors espouse and have your sole exposure through multinational companies. Yes… there are many great multinationals with huge emerging market businesses – a company like Colgate Palmolive Co. (NYSE: CL ) comes to mind – they’re not the best way to gain exposure to developing markets’ economic growth. I like to use this analogy when explaining this point to clients: Let’s say a Japanese investor wanted exposure to the U.S. economy. His broker recommends Toyota Motors Corp. (NYSE: TM ). After all, Toyota sells a lot of cars in the United States. Silly, right? Toyota shares aren’t a good way to play the overall U.S. economy, as the stock only represents a very select fraction of market success. Neither is investing in emerging markets solely through multinationals. Investing in emerging local companies is the best way to profit from more specific foreign trends. There are all manner of resources available these days for researching foreign companies and stocks. It does take a bit of work, but the rewards can be well worth the time. Alternatively, you can leave the work to proven, active fund managers. Regardless of which route you prefer, now is a good time to build positions in emerging markets. Original Post

Short Gold With These ETFs

The rally in gold ETFs that was spurred by the safe haven demand in the wake of the Chinese market rout, overall global growth worries and nagging oil price declines at the start of 2016, has started to lose steam. Possibilities of another Fed rate hike as early as in April, given stronger U.S. economic numbers and an upward shift in Q4 GDP data have added strength in the greenback lately. Notably, PowerShares DB US Dollar Bullish ETF (NYSEARCA: UUP ) added over 1.3% in the last five trading sessions (as of March 24, 2016). As a result, a surging greenback weighed on the yellow metal as these are mostly priced in the U.S. dollar. Also, rate hike talks pushed up the U.S. Treasury bond yields in recent times, which in turn wrecked havoc on non-interest bearing assets like gold. In any case, the outlook for gold investing was appalling (read: Pain or Gain Ahead for Gold ETFs in 2016? ). The metal saw its third consecutive annual decline in 2015, being crushed heavily by the strength of the greenback in the wake of the Fed policy tightening, demand-supply imbalances and tepid global inflation (especially in the developed markets). As a result, the largest gold bullion ETF SPDR Gold Shares (NYSEARCA: GLD ) lost over 11% in 2015, followed by a 3.8% decline in 2014 and 28.8% in 2013 (see all precious metal ETFs here ). Now the renewed talks of Fed tightening have cast a shadow over this space. The price of gold fell to the lowest level in more than a month of late. Following the Fed meeting in mid-March, which indicated two more hikes this year, the largest gold bullion ETF SPDR Gold Shares saw asset outflow of $844.9 million from March 20 to March 27, 2016. As a result, investors who are bearish on gold right now may want to consider a near-term short on the precious metal. Below, we highlight a few such options (read: Believe in Goldman? Short Gold with These ETFs ). DB Gold Short ETN (NYSEARCA: DGZ ) This ETN has an inverse (opposite) relation to the movement of gold prices and thus creates a short position in the underlying index. It has managed assets of $23.9 million so far in the year and trades in average daily volume of more than 200,000 shares. This suggest a relatively wide bid/ask spread increasing the total cost for the product beyond the annual fees of 75 bps. DGZ added about 2.7% in the last five trading sessions (as of March 24, 2016). DB Gold Double Short ETN (NYSEARCA: DZZ ) This ETN seeks to deliver twice (2X or 200%) the inverse return of the daily performance of the Deutsche Bank Liquid Commodity Index-Optimum Yield Gold, as per etfdb. The note charges 75 bps in fees per year from investors. The product has amassed about $52.8 million in AUM. The ETN generated impressive returns of about 4.4% in the last five trading sessions (as of March 24, 2016). ProShares Ultra Short Gold ETF (NYSEARCA: GLL ) This fund seeks to deliver twice the inverse return of the daily performance of gold bullion in U.S. dollars; the gold price is fixed for delivery in London. The product is expensive when compared to the other geared options in the space, charging 95 bps in fees a year. The $60-million fund trades in average daily volumes roughly 30,000 shares. The ETF gained 5.6% in the last five trading days (as of March 24, 2016). VelocityShares 3x Inverse Gold ETN (NASDAQ: DGLD ) This product provides three times (300%) short exposure to the daily performance of the S&P GSCI Gold Index Excess Return plus a daily accrual equal to the return that could be earned on a notional capital reinvestment at the 3-month US Treasury rate less the daily investor fee. The ETN has been able to amass an asset base of $18 million. The product is a high cost choice in the gold bullion space, charging 135 bps in fees per year from investors. Additionally, it has a wide bid/ask spread given its small average daily volume of 60,000 shares that increases the total cost of the product. Not surprisingly, the note returned an excellent 8.8% in the last five days (as of March 24, 2016) buoyed by negative sentiments for gold across the globe. Original Post

5 Low-Cost ETFs Poised For Long-Term Wins

The global ETF industry has been growing by leaps and bounds and has already accumulated almost $4.5 trillion in assets, as per ETFGI data. ETFs gained popularity over mutual funds because of their flexibility, liquidity and low cost among other factors. In fact, low cost has been one of the biggest drivers for the ETFs, enhancing their total returns. This is primarily because fund managers generally don’t actively manage an ETF. As these products often engage in passive index-based investing, they charge a much smaller fee. Several research reports have shown that only a handful of fund managers outperform the market over the long term. This gives a major boost to passive investing strategies. As per the 2015 SPIVA U.S. Scorecard , over the last five years, 84.2% of large-cap managers, 76.7% of mid-cap managers, and 90.1% of small-cap managers underperformed the S&P 500, the S&P MidCap 400 and the S&P SmallCap 600, respectively. The number of managers outperforming the benchmark index is equally bleak over the 10-year investment horizon. Roughly 82.14% of large-cap managers, 87.61% of mid-cap managers, and 88.42% of small-cap managers lagged their respective benchmarks. Additionally, managers across all international equity categories failed to outperform their benchmarks in the above mentioned time frame. Although there are several cost components to an ETF like trading commissions and bid/ask spreads, expense ratios are paid the foremost attention by investors. With several ETF providers including iShares, Vanguard and Charles Schwab vying with each other, ETFs have gotten cheaper every year (read: 5 Costly ETF Mistakes You Can Easily Avoid ). Knowing how important the expense ratio is, we have highlighted five of the cheapest ETFs for long-term investors (see: all the ETFs with Low Expense Ratios here ): iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA: ITOT ) – Expense ratio: 0.03% This fund provides a broad exposure to the U.S. equity market by tracking the S&P Total Market Index and is one of the low-cost choices in the equity ETF world, charging just 3 bps in annual fees. Holding 3,819 securities, the fund is widely diversified across sectors and securities. Information technology is the top sector accounting for less than 20% while Apple (NASDAQ: AAPL ) is the top firm taking 2.7% share of the basket. Large caps account for 74% of the assets while mid and small caps take the remainder. ITOT is a popular and liquid ETF with AUM of $3.6 billion and average daily volume of 286,000 shares. The product has delivered 70.9% returns over the last five-year period. Schwab U.S. Broad Market ETF (NYSEARCA: SCHB ) – Expense ratio: 0.03% This fund also provides a broad exposure to the U.S. equity market. The fund tracks the Dow Jones U.S. Broad Stock Market Index and charges just 3 bps in annual fees. Holding 2,077 securities, the fund is widely diversified across sectors and securities. Like ITOT, information technology is the top sector accounting for less than 20% while Apple is the top firm taking 3.3% share of the basket. Large caps account for 73% of the assets while mid and small caps take the remainder. SCHB is one of the popular and liquid ETFs with AUM of $5.8 billion and average daily volume of 927,000 shares. The product has delivered 70.7% returns over the last five-year period. Schwab U.S. Large-Cap ETF (NYSEARCA: SCHX ) – Expense ratio: 0.03% This fund targets the large-cap segment of the U.S. equity market by tracking the Dow Jones U.S. Large-Cap Total Stock Market Index and holds 777 securities in its basket. Here again, information technology is the top sector with just over 20% share while Apple is the top firm at 3%. With an expense ratio of 0.03%, the fund has amassed $5.3 billion in its asset base and volume is solid at over 783,000 shares. While this is a large-cap fund, mid and small caps take minor portions each in the basket. The fund has gained about 72.4% over the past five-year period. Vanguard Total Stock Market ETF (NYSEARCA: VTI ) – Expense ratio: 0.05% This ETF follows the CRSP US Total Market Index, holding a large basket of 3,712 securities. Each security holds no more than 2.5% of total assets while financials, technology, consumer services and health care make up for a nice sector mix in the portfolio. It is one of the largest and a popular fund with AUM of nearly $57.9 billion and average daily volume of nearly 3.5 million shares. It charges 5 bps in fees and expenses and has gained 70.3% over the past five years. Vanguard S&P 500 ETF (NYSEARCA: VOO ) – Expense ratio: 0.05% This is another low-cost, well-diversified large-cap fund tracking the S&P 500 index. It holds 505 securities in its basket with each taking less than 3.2% share while sector-wise too, none accounts for more than 21% of assets. The fund has AUM of $43.5 billion and trades in heavy volume of 2.7 million shares per day on average. Expense ratio came in at 0.05%. The ETF returned about 74.5% in the same period. Link to the original post on Zacks.com