The bull market is getting long in the tooth and more stock investors are growing cautious.
Nevertheless, people should still stay invested and look to undervalued segments, such as emerging market exchange traded funds.
In a volatile 2016, investors have pulled out about $53 billion from U.S. equity funds while investing $225 billion into fixed income funds, which suggests market participants are growing more cautious of riskier stocks.
However, investors shouldn’t be to conservative, given the ongoing supportive fundamentals.
“I believe we do not have any reason to be highly concerned given the macro environment; interest rates are still low, and I think fiscal policy is okay,” VanEck CEO Jan van Eck said in a research note. “Valuations are very stretched, and that tends to concern some commentators, but because technicals are now supportive, I feel that is not the biggest concern. This indicates staying invested.”
While most markets trading near all-time highs, investors can still find some areas of opportunity, such as the emerging markets. The emerging markets have recently picked up momentum after years of underperforming developed markets, and the global segment remains relatively attractive.
“I believe that there is one area that we have been giving more attention recently and that is emerging markets equities, given that these equities have been inexpensive for several years,” van Eck said. “Finally, the technical support has come in to support these investments. Oddly enough, post-Brexit, there has been a flood of investor money moving into emerging markets equities and bonds. Emerging markets, both equities and fixed income, is an area that we feel most comfortable with when viewed from a longer term allocation perspective.”
[related_stories]The Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and iShares MSCI Emerging Markets ETF (NYSEArca: EEM), the two largest emerging market ETFs, have increased 18.0% and 16.6% year-to-date, respectively, compared to the 6.2% gain in the S&P 500.
Nevertheless, the emerging markets remain attractively priced, with VWO showing a 13.7 price-to-earnings ratio and a 1.5 price-to-book, and EEM trading at a 12.9 P/E and a 1.4 P/B. In contrast, the S&P 500 Index is showing a 19.1 P/E and a 2.7 P/B.
Income-oriented investors may also find much more attractive yield opportunities with emerging market debt. For instance, the broad VanEck Vectors Emerging Markets Aggregate Bond ETF (NYSEArca: EMAG), which includes a combination of U.S. dollar-, euro- and local currency-denominated bonds, comes with an attractive 4.00% 30-day SEC yield.
The VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (NYSEArca: EMLC), which tracks emerging market bonds denominated in the local currencies or in the currency of the issuing country, has a 5.49% 30-day SEC yield.
Additionally, the VanEck Vectors Emerging Markets High Yield Bond ETF (NYSEArca: HYEM), which targets USD-denominated speculative-grade emerging-market bonds, has a 6.02% 30-day SEC yield.
Investors seeking to build a diversified investment portfolio should consider incorporating emerging market stocks and bonds, which may potentially enhance returns over the long haul and provide low correlation with other asset classes.