With the MSCI Emerging Markets Index down more than 4% this year, it’d be easy for advisors to be dismissive of stocks in developing economies.
Throw in lack of visibility as to when Beijing will take its foot off the regulatory gas pedal and the near-term outlook for emerging markets becomes murkier because China is usually the largest percentage (by far) of traditional emerging markets indexes and the related exchange traded funds.
Conversely, not all developing economies are home to lower-performing equity markets like China. Some, think India and Russia as just two examples, are home to thriving equity markets. That underscores the utility of making contrarian bets with the WisdomTree EM Factor Portfolio.
The model portfolio contains five exchange traded funds, each of which employ various factor-related methodologies and several of which feature reduced exposure to Chinese stocks.
A Multi-Factor Approach to Cover the Bases
One of the primary issues confounding investors mulling emerging markets today is profitability. Many companies in developing countries aren’t generating earnings growth on par with U.S. firms.
“This time it’s about profits. U.S. companies have increased earnings at a record rate in recent years while earnings growth in emerging markets has barely budged. Since 2010, earnings per share for the S&P 500 Index has grown 9.5% a year, compared with just 2.7% for the MSCI Emerging Markets Index,” reports Nir Kaissar for Bloomberg.
On that note, the WisdomTree model portfolio takes a multi-factor approach. For example, the WisdomTree Emerging Markets ex-State-Owned Enterprises ETF (XSOE) offers a growth lean by avoiding slow-moving state-controlled companies that often have slack rates of earnings growth.
Other holdings, including the WisdomTree Emerging Markets SmallCap Dividend Fund (NYSEArca: DGS), offer quality and income. When accounting for earnings, dividends, and valuation, the model portfolio could be an ideal way to harness emerging markets opportunities today.
“But earnings growth isn’t the only driver of stock returns. Dividends and valuations play a role, too. When all three variables are considered, emerging markets appear to be the better bet. Analysts expect a dividend yield of 3% from emerging markets, compared with 1.5% for the S&P 500. When combined with earnings growth, the advantage for U.S. stocks shrinks to 1.4 percentage points a year,” adds Bloomberg.
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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.