The widely followed MSCI Emerging Markets Index is up 6% year-to-date, as of July, and while that’s a decent showing, it’s also a far cry from the 16% returned by the S&P 500.
There are still risks to consider in developing economies, presenting continued opportunity for model portfolio investing. Enter WisdomTree’s Emerging Markets Factor Portfolio, which is part of a broader suite of factor-based model portfolio, including domestic and ex-US developed markets offerings.
Although emerging markets equities are laggards to this point in 2021, the model portfolio could be a less risky way for advisors to provide clients with exposure to this asset class. In a time of global economic growth, investing abroad is a crucial part of a balanced portfolio.
“Emerging-markets stocks can be useful to U.S. investors for diversifying a portfolio, since they don’t move in lockstep with U.S. shares,” reports Dan Weil for the Wall Street Journal. “But emerging-markets shares come with higher volatility than developed-market stocks and an array of risks, including political risk, currency risk, liquidity risk—and economic risk, despite the rosy projections.”
Model Portfolio Recipes for Success
The WisdomTree model portfolio features five factor-based exchange traded funds, including three of WisdomTree’s own funds.
Confirming its tilt toward the quality factor and leverage to expected dividend growth in developing economies this year, the WisdomTree Emerging Markets SmallCap Dividend Fund (NYSEArca: DGS) and the WisdomTree Emerging Markets Quality Dividend Growth Fund (DGRE) are two of the five holdings in the model portfolio.
Another selling point for advisors to discuss with clients regarding this model portfolio is diversification. Chances are clients are already heavily allocated to domestic stocks, but they may be lacking adequate exposure to ex-U.S. equity opportunities.
“Emerging markets also represent diversification opportunities for U.S. investors. That’s partly because economic growth and financial-market performance in emerging markets are less correlated with the U.S. than advanced economies and financial markets are. In addition, emerging markets give U.S. investors currency diversification, which can be helpful when the dollar is weak,” continues the Journal.
The model portfolio offers another advantage: reduced exposure to state-owned companies by way of a 40% allocation to the WisdomTree Emerging Markets ex-State-Owned Enterprises ETF (XSOE). In developing economies, state-controlled companies can expose investors to environmental, social, and governance (ESG) risks and lower rates of earnings growth, among other undesired traits.
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.