With unemployment high, stock markets off previous levels, federal deficit in the trillions and a depressed dollar, the U.S. may be losing its edge. Don’t lose heart; look at global exchange traded funds (ETFs) instead.
Still, venturing abroad has its own set of risks – such as currency and political volatility – and emerging markets are 60% more volatile than the rest of the world. Another factor is that foreign stocks may already reflect high growth, which make them less of a bargain, remarks Jim Gallagher for DailyMe.
But putting that aside, there are big reasons to consider these markets as a portion of your portfolio.
The International Monetary Fund (IMF) calculates that U.S. economic growth will be 2.7% this year, 1% in the eurozone and 1.8% for Japan. It’s growth, sure. But look at forecasts elsewhere: China is projected to grow 10%, 7.7% in India and 4% in Mexico. In emerging markets overall, a growth rate of 6% is projected. [How to Choose Emerging Market ETFs.]
American investors have noticed the faster growth prospects of the developing world, and 95% of American investments in foreign stocks have gone into emerging markets, comments Alan Skrainka, chief market strategist at Edward Jones in Des Peres. However, Skrainka believes that investors should think twice about jumping into this market since it may be too late to be overly committed. Is it really too late?
- China is thought to be in a bubble that was fueled by government-manufactured growth.
- India may be a better investment since it is less dependent on exports and friendlier to foreign investors.
- Brazil and Mexico are natural resource plays. [The Best ETFs to Play Brazil.]
- Europe may also be a decent pick if the euro starts to strengthen against the dollar.
The truth of the matter is that you can’t fight the trend. It’s there right now. It could end tomorrow or next month or next year. This is exactly why we follow trends; we look for spots where trends are in place. Whether they’re short-term or long-term, no one knows. But if the fundamentals align with what’s happening, it’s worth considering. [The Best ETFs for India’s Booming Economy.]
The strategy works like this: When a position is above its 200-day, it’s a buy signal. When it drops below or 8% off the recent high, it’s a sell signal. Having such a strategy has you in a position in time for any potential long-term uptrend, while having a point at which you sell puts a cap on your losses. Currently, most emerging market ETFs are above their trend lines. [New Year, New ETF Strategy.]
For more information on emerging markets, visit our emerging markets category.
- Vanguard Emerging Markets ETF (NYSEArca: VWO)
- iShares MSCI Emerging Markets Index (NYSEArca: EEM)
- iShares MSCI Brazil (NYSEArca: EWZ)
- PowerShares India Portfolio (NYSEArca: PIN)
- iShares FTSE/Xinhua China 25 Index Fund (NYSEArca: FXI)
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.