Emerging Markets Are Tough to Approach. This Model Portfolio Helps

Emerging markets stocks are tempting, but the asset class is often tricky to navigate. Financial advisors can ease that burden with model portfolios.

Enter the Emerging Markets Multi-Factor Portfolio.

“This model portfolio is designed for investors with a long-term horizon looking for exposure to a broad universe of Emerging Market equities primarily using factor focused ETFs. The selected ETFs provide certain factor tilts that have the potential to generate excess return relative to comparable cap-weighted benchmarks over longer-term holding periods. The strategies may use both WisdomTree and non-WisdomTree ETF,” according to WisdomTree.

This model portfolio’s depth is appealing to advisors and clients because it the often confusing asset class more approachable.

“American investors are intrigued by emerging-markets stocks,” writes John Rekenthaler for Morningstar. “The reason for it is their economic prospects. The Asian Tigers of Hong Kong, Singapore, South Korea, and Taiwan have enjoyed remarkable development, to the point where many no longer consider those nations to be emerging. Attention has now turned to their successors: Brazil, Russia, India, China, and South Africa.”

A Model Portfolio Made for Sturdy Returns

Chinese stocks have shown ample resilience to the coronavirus backdrop last year. Now, investors are wagering that strength will carry over into 2021. That’s relevant to the WisdomTree model portfolio because its components feature varying degrees of China exposure.

“While most developed markets, including the U.S., hope to exit recession by the end of the second quarter, China ended 2020 with economic growth of 2.3%,” according to Morgan Stanley Wealth Management. “Even more significant, government stimulus wasn’t a major driver of this growth, giving policymakers more room to act if the economy stalls. Equally important, its exports to the U.S. have rebounded to 2018 levels, as of December—evidence of having weathered the hit from U.S. tariffs and trade tensions in 2018-19. Moreover, its share of total global exports climbed to 14.3% last year, an all-time high.”

If the Federal Reserve holds fast to its commitment to keep rates low, the dollar will grow weaker. This will help translate into more strength for local currencies in emerging markets.

Still, investors should be careful of embracing emerging markets equities simply because the asset class is attractively valued.

“A common justification for emerging markets’ recent struggles–if 13 years can be called “recent”–is that such issues have become unpopular,” says Rekenthaler. “By this explanation, the problem lies not with emerging markets’ businesses, but instead with reduced investor expectations. Emerging-markets stocks have become value investments. When they return to fashion, their price multiples will expand, permitting them to lead the way once again.”

For more on how to implement model portfolios, visit our Model Portfolio Channel.

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.