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VWO: Is Now The Time To Add Emerging Market Exposure To Your Retirement Portfolio?

Summary Investing for retirement can be as simple or as complex as you want to make it. One well diversified global ETF with a low expense ratio is a good start. Given the relative under-performance of emerging markets over the last five years, now might be a good time to add exposure to emerging market equities to your retirement portfolio. This article reviews VWO, an ETF that can be added to the core portion of most investors’ portfolios to increase exposure to emerging market equities. Simply Investing – Philosophy Keep investing simple, consistent, diversified and low cost and you will significantly increase your chance of success. One well diversified global ETF with a low expense ratio is all that is required for many people starting to invest in equities, and an ETF that meets these criteria is the Vanguard Total World Stock ETF (NYSEARCA: VT ). As an investor’s experience, time dedicated to investing activities and desired risk, increases, many investors add ETFs to the core of their portfolio to gain exposure to new areas or increase exposure to areas that the investor believes will outperform. The next step for many investors is to allocate a percentage of their portfolio to “edge” positions, which offer additional risk and opportunity. Vanguard FTSE Emerging Market ETF (NYSEARCA: VWO ) This article reviews VWO, an ETF that can be added effectively to the core portion of most investors’ portfolios to increase exposure to emerging market equities. VWO – Investment Synopsis VWO’s objective is to closely track the return of the FTSE Emerging Markets All Cap China A Transition Index. VWO invests in stocks of companies located in emerging markets around the world, such as China, Brazil, Taiwan, and South Africa. VWO has high potential for growth, but also high risk. VWO is only appropriate for long-term goals and a small proportion of an investor’s retirement portfolio. VWO performance compared to the S&P 500 (click to enlarge) Source: Yahoo Finance (12/7/2015) As the chart above shows, the S&P 500 has significantly outperformed VWO over the last five years. There are a number of reasons for this including the relative strength of the U.S. economy and the U.S. dollar compared to emerging market economies and currencies. While the out-performance of the U.S. market may continue for some time, after such an extreme period of under-performance by emerging market stocks, now might be a good time to start building or add to a core position in emerging market stocks in anticipation that this under-performance will, at some point, at least partially reverse itself. VWO -Equity Characteristics Source: Vanguard (as of 10/31/2015) As the table above indicates, VWO is well diversified, holding 2,560 stocks. The median market cap is large at $14.9 billion. VWO’s current price/earnings ratio at 16.0 is high compared to historical levels but quite a bit lower than that of the U.S. market as emerging markets have underperformed the U.S. market for several years, as shown in the previous chart. VWO – Top 10 Holdings Source: Vanguard (as of 10/31/2015) VWO’s top ten holdings are very large companies and at 18.1% of total net assets, make up a fairly large proportion of the total holdings. VWO – Country Diversification Source: Vanguard (as of 10/31/2015) Chinese and Taiwanese companies together make up 42.5% of the holdings of VWO. Some investors may not want to concentrate their emerging market exposure in these two countries. Expenses and dividend yield VWO’s expense ratio is 0.15%, this is well below the average expense ratio of similar funds at 1.53%. Given the relatively high price of the global equity markets today and particularly the U.S. markets, it is likely that future returns, at least for U.S. markets, may be lower than those recently experienced. In this environment, it is important that the core of your portfolio is allocated to funds with low expense ratios like VWO. VWO’s forward looking dividend yield is 3.23% based on the last four quarters distributions. Vanguard Emerging Markets Stock Index Fund and ETF moves to transition index One further consideration for potential investors in VWO is that on November 2, 2015, VWO began tracking a new FTSE transition index that over time will build exposure to small-capitalization stocks and China A-shares. The transition index will be used for approximately one year to reduce the costs associated with trading large amounts of securities in a short period. The fund will sell large-cap and mid-cap stocks on a monthly basis while proportionally adding exposure in China A-shares and small-cap ex China A-shares based on each security’s weight in the index. At the end of the transition period, the fund will begin tracking the FTSE Emerging Markets All Cap China A Inclusion Index. Given this recent change and we are in the midst of a transition period, VWO may not be an appropriate investment for all investors looking for emerging market exposure. Other Emerging Market ETFs Above is a list of the top 10 emerging market ETFs, listed by assets under management (AUM). For those that want to do further research, additional detail on these ETFs is available on Seeking Alpha’s ETF Hub. Conclusion Your chance of long term investment success increases significantly by keeping your investing simple, consistent and well diversified. Most investors would benefit by building a core position in a well diversified global ETF with a low expense ratio like Vanguard Total World Stock ETF . After establishing this core position, well diversified, low cost, emerging market ETFs like VWO can increase your exposure to emerging markets for those investors looking to do so.

Will GLD Keep Losing Its Shine?

Summary The gold market is expected to be pressured down as the U.S. dollar resumes its upward trend and the Fed moves towards raising rates. The focus is shifting towards the Fed’s normalization path. The market estimates only two to three rate hikes next year. Shares of the SPDR Gold Trust ETF (NYSEARCA: GLD ) and price of gold climbed back up last week, in part as the U.S. dollar changed course and fell following the lower than expected rate cut by the ECB. In her recent testimony to Congress, FOMC Chair Yellen signaled the U.S. economy is ready for higher rates. And the last non-farm payroll report , in which 211,000 jobs were added back in November, reaffirmed market expectations for the Fed to raise rates this month. Labor market continues to improve The recent NFP report showed a bit higher than expected growth in number of jobs. Wages rose by 0.2%, month over month and by 2.3% for the year. And while not all figures in the report were good — the real unemployment (U6) edged up to 9.9% — it was still overall good enough to pave the way for a December rate hike. Thus, this jobs report along with Yellen’s testimony should have raised the implied probabilities of a rate hike but for now the odds are at 79% — little changed from the previous week. The problem with raising rates at this stage is that the core inflation is still low. And it will be even harder for inflation to rise as the Fed’s cash rates moves up. Nonetheless, as the Fed moves towards raising rates in the next meeting, the price of GLD could resume, even if over the short term, its downward trend. And once the FOMC raises rates this month, the median outlook the Fed targeted in September will be met, as indicated in the table below. Source: Fed’s website Even though the labor market is doing well enough to prompt the Fed to raise rates this month, this week the JOLTS report will provide another perspective about the progress of the labor market. The recent depreciation of the U.S. dollar, mainly against the Euro, came after the ECB didn’t introduce stimulus as the market expected. The recent break we had from the rally of the U.S. dollar has helped pull back up GLD. And the U.S. dollar is expected to resume its rally, which will keep pressuring down GLD. Looking beyond the upcoming rate hike, and assuming the Fed moves forward and raises rates this month, the outlook for the future hikes suggest only a few rate raises in 2016. If rates were to rise at a slower pace than previously expected, this could hold the price of GLD from falling next year. (click to enlarge) Source: Fed-Watch The table above shows the implied probabilities over the next FOMC meetings 2015-2016. Based on these figures, the market expects the target rate to reach 0.84% by the end of 2016 – over 0.5 percentage point lower than the FOMC’s median outlook of 1.375%. Based on the Fed-watch outlook, this implies two rate hikes next year of 0.25% (again, assuming the Fed were to raise rates this year). If this outlook will coincide with FOMC members’ estimates, then the Fed will revise down its projections in the next meeting. And downward revisions could partly offset the expected adverse impact the rate hike will have on GLD. If rates were to remain lower than currently expected next year, the downward pressure on GLD will be less intense. Bottom line The gold market isn’t expected to shine or see rising prices anytime soon, especially as the Fed moves towards raising rates in December and U.S. dollar keeps climbing against other currencies. But following the initial rate hike, which is likely to have a short term negative impact on gold prices, it will be more important to see how the Fed plans raising rates in 2016. The current market outlook aims towards only 2 to 3 hikes next year. Lower than previously estimated rates could hold GLD from plummeting, albeit this won’t stop the general downward trend. For more please see: ” Gold and Inflation – Is there is relation? ”

Managements Leading Companies Off A Cliff

By Tim Maverick The quickest and surest way for investors to lose money is to invest in companies where the management is, to put it politely, incompetent. Numerous instances exist throughout history. But we’re perhaps seeing the worst example ever, and it’s from the global mining industry . The level of incompetence being displayed is simply astonishing. Chinese Steel Collapse China has the world’s biggest steel industry, producing half of all steel. Crude steel output there soared more than 12-fold between 1990 and 2014. But now, thanks to overcapacity, the Chinese steel industry has shifted into reverse in a big way. Prices have fallen by nearly 30%. Steel rebar prices in China on the Shanghai Futures Exchange are at all-time record lows. Rebar prices are down 30% this year alone. As losses continue to mount for the industry, even Xu Lejiang, Chairman of giant steelmaker Shanghai Baosteel, said that the industry’s output will collapse by a fifth in the not-too-distant future. Forecasts are for a drop in production of at least 23 million metric tons (mmt) over the next year. The China Iron and Steel Association is in general agreement. It says that output probably permanently peaked in 2014 at 823 mmt. In effect, we’ve seen peak steel. Iron Ore Dreams That’s bad news for the major iron ore miners – Vale S.A. (NYSE: VALE ), Rio Tinto PLC (NYSE: RIO ), and BHP Billiton (NYSE: BHP ). China will cut back on its imports of iron ore, a key ingredient in steelmaking. The evidence is already there. The Baltic Dry Index, which includes ships that carry ore, hit its all-time low on November 20 at 498. Iron ore itself hit an all-time low – spot pricing began in 2008 – about a week ago at $43.40 per metric ton. Logic would dictate the miners cut back production. So does Economics 101. But the managements at the big three continue to live in a fairy tale. They continue clinging to their forecast – that Chinese steel output will rise 20% over the next decade – like drowning men to a life preserver. In fact, Rio Tinto still forecasts that annual Chinese steel production will hit a billion tons by the end of the decade. So the three blind mice (iron ore miners) continue raising output, using a scorched earth policy to eliminate the competition. In fact, next year, Vale will open the world’s largest iron ore mine (Serra Sul in Brazil). And the iron ore sector isn’t alone. Other mining segments – including copper, zinc, and nickel – continue to produce as if there’s no tomorrow. How to Spot the Bottom Eventually, the long nightmare for shareholders in mining companies will end. So how do you spot the signs that a bottom is coming and brighter days are ahead? Output cuts will help. But if Company A cuts its production, the dreamers at one of the big three miners will simply raise their output even more. A true signal will be the removal of one of these totally incompetent management teams. That should start the ball rolling towards real change. I then expect the big miner that made the change to finally say “uncle.” And I don’t mean just deciding to finally cut back on output. I mean throwing in the towel completely, walking away from a segment like iron ore, and permanently shutting down production. If a permanent shutdown doesn’t occur, miners will be in the same boat as shale oil producers. As soon as the price blips up a few dollars, a flood of supply hits the market. A commodities version of Sisyphus, if you will. That may happen sooner rather than later. In iron ore, for example, the price is quickly approaching the break-even level for some of the big miners. This is despite falling freight, oil, and currencies helping to lower miners’ costs. Until the permanent shuttering of mines occurs, the sector will remain in its downward spiral. Original Post