International mutual fund and exchange traded fund investors have not been fully insulated from volatility in the emerging markets as many products include some developing country exposure. Nevertheless, one can use ETFs to better manage global market exposure.
International stock mutual funds may hold 20% to 30% of assets in developing economies, and some even have over 40% of assets allocated to emerging markets, reports Daisy Maxey for the Wall Street Journal.
The emerging market exposure is especially worrisome in today’s market as volatility in developing countries is weighing on performance. According to Morningstar, ten of 12 foreign stock and world stock funds with the highest emerging market exposure trailed peers on average so far this year, with emerging market funds down 13% on average.
Looking at some of the largest international stock ETFs, the iShares MSCI ACWI ETF (NasdaqGS: ACWI), which tries to reflect the performance of the MSCI ACWI Index, includes developed market exposure 93.6% and emerging markets is 6.4%. The Vanguard Total World Stock ETF (NYSEArca: VT), which follows the FTSE Global All Cap Index, includes 93.5% developed market and 6.5% emerging markets. [ETFs to Access Stronger Overseas Developed Markets]
Additionally, for foreign market exposure, the Vanguard FTSE All-World ex-US (NYSEArca: VEU), which tracks international stocks and excludes the U.S. markets, has lower developed market weight of 85.7% and higher 14.4% emerging market tilt. The iShares MSCI ACWI ex U.S. ETF (NasdaqGM: ACWX) also holds 85.8% developed market and 14.2% emerging market.
Year-to-date, ACWI fell 4.7%, VT declined 4.1%, VEU dropped 5.0% and ACWX decreased 5.5%.
Alternatively, investors can focus on foreign developed markets through EAFE, or Europe, Australasia and Far East, related ETFs. The iShares MSCI EAFE ETF (NYSEArca: EFA) and Vanguard FTSE Developed Markets ETF (NYSEArca: VEA) include about 60% Europe and 30% Asia exposure.
Without the emerging market tilt, the EAFE index funds at least held up slightly better than broader international stock funds. EFA was only 1.5% lower and VEA was down 1.4% year-to-date.
Meanwhile, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), the two largest emerging markets ETFs by assets, fell 14.5% and 15.1% year-to-date, respectively.
The emerging markets have been pummeled in recent weeks on the weakening outlook for growth and currencies, notably as China’s economy shows signs of slowing down. Additionally, developing markets are also bracing for the eventual Federal Reserve interest rate hike, which could cause greater outflows from the riskier emerging markets.
Nevertheless, by separating developing and developed market exposure, investors may more control over their investment exposure. With more money managers seeing an opportunity in the attractively priced emerging markets after the multi-year underperformance, investors may also assess their level risk tolerance and add emerging market exposure through a targeted ETF.
“Emerging markets versus U.S. stocks is the trade of the decade,” Rob Arnott, manager of the Pimco All Asset Fund, told the WSJ. “We’ve gone from disliking emerging-markets equities in 2008 to liking them slightly by 2013 to liking them a lot today. A lot of it hinges on simple measures of valuation.”
For more information on international investments, visit our global ETFs category.
Max Chen contributed to this article.