In a recent Newsweek International story, Karen Lowry Miller quipped that "Wall Street has more faith in Turkey than in General Electric." She was noting that many investors, including some at the helm of major mutual funds, are switching some of their attention from blue chips at home to stocks in emerging markets.
Why? Check out these numbers, which reflect performance in January alone:
- iShares MSCI Brazil Index Fund (NYSE:EWZ), up 24%
- FTSE/Xinhua China 25 Index Fund (NYSE:FXI), up 16%
- iShares MSCI Emerging Markets Index (NYSE:EEM), up 14%
- Standard and Poor's [500] Depositary Receipts (AMEX:SPY), up 2.5%
Emerging markets seem to be on fire lately. This caught the notice of Fool community member Casey, who asked on our discussion boards: "ETFs [exchange-traded funds] which track emerging markets are posting big gains. There is a lot of momentum there. My question is, how long do you think this momentum will last? ... I want to get into emerging markets but am wondering if this is the right time."
You can read the entire discussion that ensued here, but permit me to share a few responses:
- Ziggy29 offered a beautiful and concise answer: "If you're trying to time the market or chase what's hot, I'd advise against it personally because it is rather pricey now. But if you want to establish a long-term position in the asset class, there's really not a bad time to do it -- provided you stay invested there for the long run." This makes a lot of sense. Hot investments have often been bid up beyond reasonable levels and may pull back in the near term. But if they make long-term sense, they may still do well over the long haul.
- Newyorkbrit added some caution: "I remember South Africa [and its emerging market] back in the late '90s and 2000 and people getting in around this time in the momentum cycle got burnt very badly. Clearly a different market now -- but just a voice from the past. Also, the fairly golden-ish rule is that funds which out-perform one year tend to under-perform the next."
- Wcfenton offered some perspective: "To give you an idea of how random things are in the investing world, take a look at the Franklin Templeton chart of 'Annual Total Returns of Key Asset Classes' (PDF file) over the last 15 years. ... Emerging Markets has occupied the bottom of the chart almost as often as the top -- where it currently resides."
So what should you do? Take some time to learn more. If your portfolio has no international exposure, it's a good idea to add some, for diversification's sake -- whether via an ETF, mutual fund, or carefully selected individual stocks. Should the U.S. economy slump, your portfolio may be bolstered by China or India. Emerging markets tend to be a higher-risk subsector of the international sphere, offering the chance of higher returns.
Learn more about exchange-traded funds in our ETF Center. It features info on how ETFs stack up against mutual funds, how to develop an investment strategy with ETFs, pitfalls to dodge, and how to avoid ETF imposters. Plenty of ETFs can give you instant exposure to many emerging markets' nooks and crannies.
These articles may also be of interest:
- Mutual Funds vs. ETFs
- Three Things to Know About Your ETF
- Buy the Whole Mall
- The Age of the Exchange-Traded Fund
- ETFs and Falling Fund Fees
If you're drawn to emerging markets, some mutual funds can serve you well in that arena, too. Consider, for example, the Vanguard Emerging Markets Stock Index Fund (FUND:VEIEX). It gained 58% in 2003, 26% in 2004, and 32% in 2005, and it's up about 10% so far this year. (Of course, it's had some bad years, too.) Its top holdings include Mexico's Cemex (NYSE:CX) and Taiwan Semiconductor (NYSE:TSM).
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.
