Why Emerging Market ETFs Belong On Your Watchlist (PXR, EWEM, EDIV, DGS, HILO)

Ron Rowland: The year is almost over, and the world’s supposedly “advanced” economies are still falling into chaos. Whether it’s Europe, the U.S., or Japan, the outlook for 2012 looks dismal.

Yet the “emerging” markets are chugging right along, generating fantastic internal growth. They’re happy to sell us their exports … but they can do just fine without us.

I’ve said for years that the emergence of China as an economic superpower would be the defining event of our time. The evidence gets stronger every day.

They're putting their heads together.
They’re putting their heads together.

And it’s not just China. The entire BRICS alliance is growing more and more powerful. They’ve formed new trading blocs with smaller neighbors and built out their infrastructure. They’re on the rise. The “developed” countries are not.

Of course, anything can happen in the short run. Emerging markets can fall and developed markets can surge. Nonetheless, for long-term money I think emerging markets are the best bet.

Six ETFs to Get You Started

If you haven’t played in this arena before, you may be worried about the volatility. The first rule of investing is: Don’t go beyond your risk tolerance. Not every opportunity is right for everyone, which is a philosophy I continually emphasize to my International ETF Trader members.

Geographic diversification is particularly important in emerging markets. Yes, the upside potential may be higher if you concentrate on a particular country or region. But your risk will be higher, too. I think investors new to emerging markets are usually better off learning the ropes before getting too specialized.

The six ETFs listed below may help you get started. While they are “aggressive” by any definition, they are intended to be somewhat less aggressive than most emerging markets investments.

#1: iShares MSCI Emerging Markets Minimum Volatility (NYSEARCA:EEMV)

EEMV sounds like it should be impossible. How can you have “emerging markets” and “minimum volatility” in the same package?

Note that word “minimum.” The sponsor doesn’t claim EEMV has low volatility. They just try to minimize it, consistent with the larger goal of being in emerging markets.

Since it was recently launched in October 2011, we don’t yet know whether iShares will be able to meet its goal for EEMV. I’ll be watching carefully.

#2: PowerShares Global Emerging Markets Infrastructure (NYSEARCA:PXR)

Infrastructure is critical to growth.
Infrastructure is critical to growth.

Newly industrialized countries have to build many things we in the developed world take for granted such as roads, airports, power lines, and ports. If they want their growth to continue, infrastructure is critical.

The stocks in PXR specialize in making it all happen. They’ve done well since the fund’s 2008 inception, despite taking a tumble in the last year.

By the way, I like PXR much better than the competing iShares S&P Emerging Markets Infrastructure Index Fund (EMIF). The PXR portfolio is more diversified with both more holdings and smaller allocations to the top holdings.

#3: Rydex MSCI Emerging Markets Equal Weight (NYSEARCA:EWEM)

In past Money and Markets columns I’ve talked about how weighting strategies can impact ETF performance, even within the same index. This holds true for emerging markets as well.

Equal weighting is one of the better methods, in my opinion. It reduces the tendency of a portfolio to become top-heavy with a small number of oversized stocks.

EWEM owns the 700+ stocks in the MSCI Emerging Markets Index with equal allocations as of each and periodic rebalancing. It’s a good way for long-term investors to get broad emerging markets exposure.

#4: SPDR S&P Emerging Markets Dividend ETF (NYSEARCA:EDIV)

#5: WisdomTree Emerging Markets SmallCap Dividend (NYSEARCA:DGS)

#6: EGShares Low Volatility Emerging Markets Dividend (NYSEARCA:HILO)

I’ve grouped these last three ETFs together because they all have a common theme: Dividends.

Dividends, of course, are nice because they give you an income stream. Some steady cash flow can make it easier to hold on when times get tough. If all goes well, you may also find yourself with some long-term growth.

These three ETFs all try to build a portfolio of dividend-paying emerging markets stocks, but each goes about it differently …

  • EDIV weights its holdings by annual dividend yield.
  • DGS looks for small-cap emerging markets stocks with healthy dividends.
  • HILO uses a quantitative index to build a more concentrated portfolio of emerging markets stocks with a history of lower volatility and relatively high yields.

I think all three strategies have good potential, but it’s hard to say which is better.

Conclusion: Take a Look at Emerging Markets

As I said earlier, you can expect a wild ride in any international investment. Domestic investments may not be much better, though. Consider how some of these ETFs may fit your needs. As you learn more, you may get comfortable taking on more risk — but you have to start somewhere!

Best wishes,

Written By Ron Rowland From Money And Markets

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss  along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and  Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff  do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not  guaranteed. Performance returns cited are derived from our best  estimates but must be considered hypothetical in as much as we do not  track the actual prices investors pay or receive. Regular contributors  and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene  Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam  Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle  Zausnig.

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