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VWO: Good Diversification At A Low Cost

I have made no secret of the fact that we are in the process of transitioning our portfolio allocation such that our portfolio’s core will be comprised of mostly passive index investments . We feel there are several advantages to this approach, but the biggest reasons for the transition are: Greater diversification while achieving tremendous time savings I don’t believe there are enough Great/Amazing companies to build a portfolio around Our intention is adjust the core of our portfolio to consist of relatively non-correlated assets. With those parameters, we can hold this passive index core year in and year out and only have to rebalance periodically. In the past I have talked about the various ETFs we intend to own. Vanguard’s FTSE Emerging Market’s ETF (NYSEARCA: VWO ) is one of them, and I profile it below. Emerging market equity investments have struggled over the past few years. Below you can see how VWO has performed over the past 5 years, compared with the S&P 500 (using SPY as a proxy). While the bull market in US equity investments has surged higher, an investment in Vanguard’s FTSE Emerging Market ETF would have lost about 28% of its principal (excluding dividends). Click to enlarge The tremendous disparity in these returns has scared some investors out of investing in emerging markets, but this is the wrong call for our portfolio. Truth be told, I am not saying that every investor should have an allocation to emerging market equities. I won’t pretend to know YOUR personal hopes, goals, etc. If, however, you have chosen to include emerging markets as part of the plan for your portfolio, you must be happy with the poor performance of emerging market equities over the past few years. I know I am. Our most recent purchase of VWO shares was at $28.37 per share, but we made earlier purchases at higher levels. We, my wife and I, believe that exposure to emerging markets is an important part of our portfolio, and we have a great deal more money we would like to allocate to this asset class. Lower prices means that we get more for our investment dollar, but more importantly it also means that we are buying more of profits of the underlying businesses with the same investment. So what do you get when you invest in Vanguard’s FTSE Emerging Market’s ETF? Well for starters, you gain exposure to more than 3600 stocks scattered throughout emerging market economies. Below is a table from Vanguard’s website of the countries with the largest exposure to VWO. The exposure is weighted more heavily toward Chinese companies than I would prefer, but on the whole this fund provides excellent exposure to quite a few different economies. Additionally, being a Vanguard ETF, the fund’s expense ratio is very low at 0.15% annually. On their website, Vanguard claims this is lower than 90% of the fund’s competitors. The less money an investor shells out in fees, the more of the investment return that investor makes. Over time, those savings compound every year. Below is a table listing the 10 largest holdings in the ETF. Many of the company names are probably recognizable to you. Many of these companies are considered the “blue chips” of their respective countries. These businesses are some of the largest and best known companies in these markets. It is important for me to know my circle of competence, and I am aware that I do not understand emerging market businesses as well as I do American companies. The transparency of company filings and foreign accounting practices generally keep me from investing in individual companies that are based in emerging market economies. Using a vehicle like Vanguard’s FTSE Emerging Markets ETF allows me to gain my desired exposure, while also diversifying away the risk that a few individual companies are fraudulent and corrupt. Clearly these companies are found across the spectrum of industries. A breakdown of VWO’s sector representation can be found below. I am pleased with this diversification because it spreads the risk of industry specific downturns across all industries. It’s very convenient to have exposure to such a range of economies, industries, and companies from a single emerging market index ETF. As discussed earlier, the stocks of many emerging market companies have taken a drubbing over the past few years. According to Vanguard, the average price to earnings ratio of the companies found within Vanguard’s FTSE Emerging Markets ETF is 14.8 and the ETF pays out a dividend yield of 2.9%. Those both compare favorably to the S&P 500’s (with SPY as a proxy) price to earnings ratio of 16.77 and dividend yield of 2.17%. Most importantly, we are gaining exposure to economies that are growing, and demographic trends ensure these economies will make up a larger portion of global GDP in the future. Disclosure: Long Vanguard’s VWO ETF. This article is for informational purposes only and should not be considered a recommendation for anyone to buy, sell, or hold any equities. I am not a financial professional. The information above is provided by Vanguard.com and Yahoo Finance. Disclosure: I am/we are long VWO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Apple Investors Should Brace Themselves: Monday Event Could Be A Yawner

You probably won’t need to hold onto your socks during Apple ‘s ( AAPL ) spring product launch event on Monday. That’s the message from Wall Street analysts trying to set realistic expectations for what’s likely to be announced. The tech press has been reporting for weeks that Apple will unveil a new 4-inch iPhone, a new 9.7-inch iPad and new Apple Watch bands at the media event Monday at Apple’s headquarters in Cupertino, Calif. “While we expect to see several ‘under the hood’ improvements across devices, we are not expecting the same exuberance as last year when Apple shared final details of the Apple Watch,” Oppenheimer analyst Andrew Uerkwitz said in a report Friday. “Moreover, we worry investors will find the next several Apple media events underwhelming.” Uerkwitz rates Apple stock as outperform with a 12- to 18-month price target of 120. Apple shares rose a fraction to 105.92 on the stock market today . Apple has a bunch of innovations in the works for release in 2017 and 2018, he said. They include possibly an iPhone with an OLED display, a virtual reality headset, 360-degree camera, and a hub for smart-home products using Siri, Uerkwitz said. Any surprises at Monday’s event likely will revolve around pricing for the new products and possibly the Apple Watch or the introduction of new MacBook or Mac Pro computers. Apple CEO Tim Cook also is likely to use the event as a platform to reinforce the company’s argument that the federal government has overstepped its legal bounds by demanding Apple hack its iPhone security. Apple and the Justice Department are set to square off in a federal court on Tuesday in a criminal case where the FBI wants Apple to develop software to bypass its password security measures. Because Apple gets most of its revenue from the iPhone (68% of sales in the December quarter), most of the attention Monday will be focused on the rumored iPhone SE. The new 4-inch iPhone will replace the same-size iPhone 5S, which was introduced in September 2013 and is still on sale. The new model is expected to sport an A9 chip, NFC technology to enable Apple Pay and a 12-megapixel, rear-facing camera to bring it up to snuff with the other iPhones. But it reportedly won’t have a pressure-sensitive screen like the premium models, the iPhone 6S and 6S Plus, which have 4.7- and 5.5-inch displays, respectively. The SE will be targeted to customers who prefer a smaller size handset as well as emerging markets because of its expected lower price. The iPhone SE “is likely to be a low-volume (for Apple) product that has minimal effect” on its earnings and stock price, Pacific Crest Securities analyst Andy Hargreaves said in a note Thursday. Hargreaves is bullish on Apple with a price target of 127 because of likely growth in the iPhone 7 cycle starting this fall. “Investors are not excited about this new phone,” Rosenblatt Securities analyst Jun Zhang said in a research note Tuesday. Zhang is “bearish” on prospects for the new iPhone SE because he expects that its price will be similar to second-hand iPhone 6 handsets in large emerging markets. “Second-hand iPhone 6’s are sold online at $350 in China, which we believe will be same price range of the iPhone (SE),” he said, adding that the price difference is such that many users will go with the larger display phone. Apple faced a similar pricing problem when it launched the iPhone 5C handset alongside the iPhone 5S. The 5C was priced only $100 cheaper than the 5S but had a cheaper-looking plastic casing. Sales of the iPhone SE are likely to be “ modest ” at 10 million to 15 million units annually, RBC Capital Markets analyst Amit Daryanani said in a research note Thursday. Still, the new phone could provide a buffer ahead of the launch of the iPhone 7, he said. Component suppliers likely to benefit from the iPhone refresh cycle include Jabil Circuit ( JBL ), Broadcom ( AVGO ), Amphenol ( APH ) and Texas Instruments ( TXN ), he said. Also Monday, Apple is expected to unveil its third-generation 9.7-inch iPad Air, which will be given similar functionality and accessories to the 12.9-inch iPad Pro. The current iPad Air 2 was launched in October 2014. The iPad Pro with its Smart Keyboard and Apple Pencil debuted last September. But the tablet business has been in decline at Apple and the new iPad is unlikely to change that, analysts say. “We do not expect the updates to materially change our outlook for iPad units, which seem likely to continue declining through fiscal 2016, but at a moderating rate,” Hargreaves said. Apple holds an IBD Composite Rating of 66 out of a possible 99, factoring in earnings growth, stock performance and several other metrics. Chipmaker Broadcom gets a 98 , Amphenol a 91 and Texas Instruments an 84. Jabil is not currently highly rated by IBD, with a Composite Rating of just 47.