Emerging Markets Help Diversification, Risk and Returns

04/21/2011 Share 0 comments

The volatility in stocks of developed nations during recession encourages diversification.  Today investors are diversifying their portfolio by investing in multiple portfolios nationally, regionally, industrially and sectors.

One area for diversification is emerging markets which give us the possibilities of strong returns and a market that behaves differently than developed nations’ equities. 

Tighter monetary policies implemented by China and India, with their fast growing economies, helped drive global growth over the past few years. We believe that the emerging market returns may prove less vigorous after two year impressive gains.

However governments of these nations have taken measures to overcome inflation by increasing interest rates and they are supported by moderate consumer growth. Emerging market stocks show a reasonable gain on the whole, particularly in solid corporate earnings and growth prospects.

Today emerging market specialists look at:

• Technology with demands for new products
• Telecommunications that offer dividend and earnings growth
• Consumer companies that saw sharp share price run-ups last year

They shy away from

• Financial stocks in a higher interest rate environment because of the monetary policy
• Companies that face increased competition from large multinational corporations.

The table shows the major emerging market diversified ETFs

The overall returns from the emerging market ETF’s are robust with many new ETF’s becoming available. The robust profits induced new ETF’s which have a significant history.

In terms of five years returns VWO & EEM are the best with returns of 9.27% & 10.11% well above the five year benchmark interest rates. The volumes are also large indicating high levels of liquidity. In term of 1 year returns VWO & EEM again are top with returns of 15.65% & 13.21%.

It is important to consider risk factors: Investing in Emerging markets can be subject to currency risk in exchange rate and restrictions on the movement of foreign currency. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

In addition, there may be less governmental supervision and regulations and political instability.

Despite this, emerging market equities from an important part of a portfolio. Regional diversification provides a hedge against volatility in the USA and other developed markets. This helps with our objective to maximize returns on portfolio while minimizing risk.

Symbols: DEM, VWO, PXH, PIE, SCHE, EEM

Disclaimer:

MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.