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Bridgewater Slashes EM ETF Exposure, Should You?

Emerging market (EM) weakness has been lately a pain in the neck for global investing, forcing several research houses to cut their global growth forecasts more than once this year. Needless to say, the investing spectrum piled up huge losses with the MSCI Emerging Market Index shedding 19% in Q3 – the largest quarterly retreat in four years – instigated by the Chinese market upheaval, per Bloomberg. Thanks to these sentiments, the world’s largest hedge fund, Bridgewater Associates, slashed 41% of its holdings in two EM ETFs – the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) and the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) – in the third quarter. This step was quite shocking since Bridgewater had been consistent in raising its investments in EM assets in recent years. Let’s detail why and how you could also take cues from Bridgewater and stay profitable. The streak of losses in the EM space started long back on a host of factors. First and the foremost was the possibility of a policy tightening in the U.S. So long, EM equities shone on huge foreign direct investment as investors targeted emerging market stocks and ETFs in search of higher yields. As a result, Fed tightening talks ravaged the emerging market asset classes spurred by fears over the cease in cheap dollar inflows. In 2013, the EM equities were slaughtered in apprehension of a QE taper in the U.S. Though the repetition of the same episode is less likely this year if the Fed enacts a lift-off in December, the investing backdrop is anything but upbeat. Yes, this time around emerging markets are more resilient and will not crush under the dollar strength like they did in 2013. But the commodity market crash, on the dual dose of greenback strength and demand-supply imbalances, would definitely add shockers to EM investing. Notably, many emerging markets are rich in commodities. This was truer given the oil price crash for over more than the last one-year period, which has wrecked havoc on oil-oriented emerging economies like Russia and Columbia. This also dealt a blow to the emerging market currencies. Upheaval in the Chinese economy and the stock market crushed the global market in August and it is still not out of woods. This episode sent shockwaves to other emerging markets, raising questions on the economic health of the entire EM bloc. EM growth is also expected to slow in 2015 for the fifth straight year. The two pillars of the BRIC region – Brazil and Russia – will likely slip into recession this year and are likely to face the downtrend next year too. IMF expects the Russian economy to contract 3.8% this year and 0.6% the next, while Brazil’s economy is expected to shrink by 3% in 2015 and 1% in 2016. China is also likely to score the most awful growth numbers in more than two decades this year. Another pillar of the BRIC bloc, India, has a decent growth profile. But a slower application of reformative measures and the loss of Prime Minister Narendra Modi’s party in the state election in Bihar, which was viewed as the Indian population’s perception of Modi’s pro-growth policies, stirred confusion over India investing too. Not only Bridgewater, several hedge funds are outright bearish on emerging markets. As per Bloomberg , Fortress Investment Group LLC indicated that emerging markets are approaching a bear market of a scale seen last during the Asian financial crisis of 1997. Credit crunch in these regions will continue till March 2017 going by the past economic cycles, according to Fortress. Forum Asset Management also pointed to a lingering pain. According to the Institute of International Finance, investors will haul out about $540 billion from the developing countries this year. Thus, investors finding this investing arena highly fragile might go short on emerging market ETFs and earn smart returns. Below, we highlight three inverse EM ETFs which could be used to tack on gains. Direxion Daily Emerging Markets Bear 3X Shares ETF (NYSEARCA: EDZ ) The fund offers three times inverse leveraged exposure to the MSCI Emerging Markets Index. The index includes 21 emerging market countries, namely Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey. The fund has amassed about $134.5 million in assets so far and charges 95 bps in fees. EDZ was up about 12.4% in the last one month (as of November 16, 2015). ProShares UltraShort MSCI Emerging Markets ETF (NYSEARCA: EEV ) The fund offers two times inverse leveraged exposure to the same index that EDZ follows. It has about $74.6 million in assets and charges 95 bps in fees. EEV was up 8.7% in the last one month. ProShares Short MSCI Emerging Markets ETF (NYSEARCA: EUM ) This fund delivers exactly the inverse exposure to the MSCI Emerging Markets Index. The fund has amassed about $419.2 million in assets and charges 95 bps in fees. EUM added over 4.3% in the last one month. Original Post

Asia’s Response To The Federal Reserve: Finding Value In Frontier And Emerging Markets

Summary The increasingly strong USD and China’s currency devaluation in August have resulted in substantial FX losses for a large number of countries in Asia. However, the extremely high level of growth and future potential in Asia can offset this risk in certain cases. As the Fed may increase interest rates soon, investment in Asia should be a strategic approach of investing in countries with high growth and a strong performing currency. This article presents Vietnam, Pakistan, India, and the Philippines as superior options for investors. As my research primarily focuses on international companies, examining the inherent FX risk is one of the most crucial aspects for considering investment. FX risks are justifiable if there is a strong growth trend in the given country, and most importantly if valuation is low. China’s devaluation in August created a global FX nightmare, and put pressure on the FED to consider the global implications of hiking interest rates. Each country’s response to this devaluation provides a clear example of the varying strengths of each currency, and this factor, coupled with the country’s macroeconomic potential, provides enough for investors to discern how to find good value in global equity. A flurry of conservative value based opportunities has emerged in global equity in Asia, for investors who are willing to take a long term horizon. Despite the Fed receiving global pressure not to hike interest rates, it appears that the Fed will not be deterred from hiking interest rates . Therefore, FX risk is one of the most relevant factors to consider at the moment, as markets in Asia may become gloomy soon. Despite this threat, good value can certainly be found in Asia at the moment, and a sell off would create a flurry of value based investment opportunities. Finding Growth While Avoiding FX Risks The performance of countries’ currencies this year, especially in response to China’s devaluation this August, provides an excellent means for investors to assess where good value can be found in Asia. Countries that have already displayed slowed economic growth, and have had substantial FX losses, should certainly be avoided. Malaysia presents the largest area of concern, due to the poor performance of the country’s currency and the increasing political risk . The iShares MSCI Malaysia ETF (NYSEARCA: EWM ) has had a YTD decline of 22.67% Slowed growth in Thailand, and the poor performance of its currency and stock market, also make Thailand a destination that can be considered less superior. The iShares MSCI Thailand ETF (NYSEARCA: THD ) has had a YTD decline of 14.14% . Based on an investigation of growth combined with exchange rate movements, I am most bullish about the upside potential of Vietnam, India, Pakistan, and the Philippines due to the combination of high economic growth and the acceptable performance of the country’s currencies. The high level of growth in these countries can be considered strong enough to offset the FX risk. In addition to high GDP growth, the trends of increased consumption in all of these countries can also be considered positive drivers: Vietnam Vietnam’s appeal for investment lies in a wide variety of factors, including its stock market’s high discount compared to other countries in Asia, high consumption and retail sales growth, high GDP growth, its high youth population, and high dividend yields for listed equity. Its P/E is approximately 12, yet a flurry of value based opportunities with single digit P/Es can be found in the country’s stock market. Vietnam’s economic growth is already substantial, yet its inclusion in the TPP can serve as an economic catalyst for the company’s GDP growth to reach 11% by 2025 . Vietnam’s low wages have caused it to have a new competitive advantage over China, resulting in a shift of manufacturing to Vietnam and a substantial increase in the country’s exports . Based on the existing trends of growth, coupled with the inevitable future growth of Vietnam’s economy, the country can certainly be considered a superior destination for value investing, as its soon to be status as an emerging market and the removal of the FOL may both serve as catalysts for higher valuation in the stock market in the future. Investors can take advantage of Vietnam’s high discount and growth by investing in VinaCapital Vietnam Opportunity Fund ( OTCPK:VCVOF ) or Vietnam Holding Ltd. ( OTC:VNMHF ). Pakistan Pakistan’s stock market index gain of 13.86% necessitates a closer look at the value associated with investing in this country, as its stock market was one of the best performing stock markets in Asia. Most impressive is the fact that low valuation can still be found in a wide number of companies on the Karachi Stock Exchange, and the Global X MSCI Pakistan ETF’s (NYSEARCA: PAK ) P/E is currently only 8 . Terrorism in Pakistan has not been able to deter the rapid and consistent ascent of the country’s stock market , and it is further edifying to note that there has been a 70% decrease in terrorism over the past 9 months. High levels of growth can be found in strategic industries, such as the construction industry, and particularly in the cement industry, which experienced growth of nearly 57% in the past year . FDI into Pakistan has increased substantially in the past years, and China has recently signed agreements for $28 billion of investment in Pakistan, which will be part of $45 billion economic corridor. Although Pakistan is a very contrarian suggestion, its relatively superior performance in Asia certainly merits it as a relevant suggestion. The Philippines While the Philippines high growth and future potential cannot be denied, the relatively higher valuation of its stock market makes it a less superior choice, as compared to Vietnam and Pakistan. The P/E for the iShares MSCI Philippines ETF (NYSEARCA: EPHE ) is currently 18 . The fund primarily invests in the financial services, consumer products, and real estate industry, which is a strategic approach considering the high levels of growth in consumption and the real estate industry. The real estate industry is perhaps one of the most strategic areas for investment in the Philippines, as its growth is heavily being driven by business process outsourcing, increased retail centers, tourism, and the emergence of townships outside of Manila. The ETF’s performance has not been terrible, with a YTD loss of only 7.3% , and a large portion of the fund’s holdings have low liquidity or high valuation. Therefore, the best approach to investing in the Philippines is through this ETF, while I would respectfully suggest the relative superiority of Vietnam and Pakistan. India India is another excellent option for investors to consider, as its economic growth surpassed the growth of Vietnam, The Philippines, and Pakistan. The country’s currency has been gradually improving, and a 4.74% loss of its currency is not strong enough to offset the appeal of investing in India. The high GDP growth, consumer spending growth, and retail sales growth is being heavily driven by the country’s demographics, as it contains the world’s largest youth population . In previous articles, I have suggested the Market Vectors Small Cap ETF (NYSEARCA: SCIF ) and EGShares India Small Cap ETF (NYSEARCA: SCIN ) as superior investment vehicles, due to the ETF’s strong earnings growth and relatively lower valuation. The average P/E for both of these ETF’s is 11.5, which can certainly be considered a strategic approach to India’s economic growth. One strategic industry in India to consider is India’s biotechnology industry, which is projected to grow by 30% annually until 2025. Investors can access the growth of India’s biotechnology by investing in Dr. Reddy’s Laboratories (NYSE: RDY ). As one of the highest growing countries in Asia, with extremely favorable demographics, a value based approach to India certainly has its merits. India is a country that will be able to stand strong amidst market volatility in Asia. Conclusion The Fed’s decision to potentially hike interest rates in December does present a relevant short term threat to markets in Asia. While a sell-off would certainly be negative for markets in Asia, it could also be seen as force that would create a flurry of value based investment opportunities in Asia. There will certainly be dark areas in Asia in the near future, yet the markets of Vietnam, Pakistan, the Philippines, and India can certainly be considered bright spots in Asia. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

The 4 ETFs That Will Replace My Portfolio’s Core

Summary All of the ETFs mentioned have annual expenses under 0.15%. The ETFs mentioned will allow broad based diversification for my portfolio’s core. These offerings are from Vanguard, but several other low cost fund families exist. Nearly two years ago I wrote an article entitled My Retirement Portfolio Could Be Replaced With These 5 ETFs . At the time, the article was written basically to as an alternative concept to my portfolio (at that time) of individual stocks. We all tend to evolve as investors over time. Each of us are on our own journey, whether we’re talking about investing or life in general. I know the focus of my life has evolved over the past few years. If you are interested in a summary my family’s journey thus far, read about it HERE . Over the past 2 years I have come to two important realizations, which encourage me to eventually rotate mostly out of individual stocks and to the portfolio outlined below. First and most importantly, there simply aren’t that many companies around the world that deserve my family’s capital. To be clear, I don’t mean there aren’t some reasonable values in the global equity markets. I am talking about companies that are so well run, and have amazingly sustainable competitive advantages, that I would commit to owning these companies for the next 20 or 30 years. Perhaps you think the idea of holding an investment for decades is a simplistic and illogical consideration, but I contend that it’s exactly my intention when I invest in an individual company on the “long-term side” of our bifurcated portfolio . For that reason, in the future I will cap individual stock investments at 25% or 30% of our portfolio’s value. It will be limited to companies that can compound my capital, and unlock value, for decades and I think those are few and far between. The second consideration in proposing the portfolio outlined below, is my personal time commitment . Currently I have a day job and enjoy researching our individual stock investments, but we are moving toward semi retirement. I anticipate additional flexibility and travel in semi retirement, but I can’t allow the time commitments of monitoring a portfolio of individual stock investments to get in the way our flexibility/freedom. That sounds too much like work. With those two considerations in mind, let’s take a look at the ETF offerings below. (Note: the funds discussed are all Vanguard offerings, but there are also other low cost fund families to consider like Fidelity and T. Rowe Price. Vanguard Total Stock Market ETF (NYSEARCA: VTI ) First up is Vanguard’s Total Stock Market ETF, my proxy for exposure to domestic US companies. In the previous article I mentioned Vanguard’s S&P 500 ETF (NYSEARCA: VOO ). Several readers commented that Vanguard’s Total Stock Market ETF might be a better alternative, because it includes both small and mid capitalization companies. After some thought, I agree. While this ETF is capitalization weighted, which in this case means it’s heavily skewed toward the large cap companies of the S&P 500, it also gives me some exposure to the small and mid capitalization companies. I like the concept of this additional exposure, because the small and mid capitalization companies tend to be much more isolated from international troubles and get nearly all of their business within the United States. I like to think of this ETF as the S&P 500, with a little extra kick. Given so much diversification, it’s hard to beat the annual expense ratio of 0.05%. Below is a snap shot of Vanguard’s Total Stock Market ETF, from Vanguard’s website. The companies in the portfolio represent a wide variety of industries. (click to enlarge) Vanguard FTSE All World ex US ETF (NYSEARCA: VEU ) The next ETF would be Vanguard’s FTSE All World ex US ETF. This fund includes stock in more than 2500 different companies around the world. The holdings are skewed to the largest capitalization companies, because of the fund’s capitalization weighting. Also as a result of the fund’s weighting, you probably recognize all of the names in the top 10 portfolio holdings. (Think Nestle ( OTCPK:NSRGY ), Royal Dutch Shell (NYSE: RDS.A ), Toyota (NYSE: TM ), and Unilever (NYSE: UL )). In the graphic below, courtesy of Vanguard’s website, you can see that this truly is a global fund. This is the type of diversification I expect from a capitalization weighted all world fund. Additionally, if you don’t feel comfortable having a large weighting of emerging market companies in your portfolio you may be able to hit your desired asset allocation within the 17.5% of this fund that represents companies located in emerging market economies. The annual expense ratio of this fund is only 0.14%, which is paltry considering the diversification (and rebalancing efforts) achieved by owning this fund. (click to enlarge) Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) If you are optimistic about the future of emerging market economies, you may want to add additional exposure to your portfolio by including something like Vanguard’s FTSE Emerging Markets ETF. I own this fund, but be warned that everyone has a different definition of what an “emerging market” economy is. Some people think of frontier economies, like those found in Africa and the Middle East. Others think of countries like Brazil, Russia, India and China. I’m not here to tell you what the right answer is, but remember that some emerging market economies have been “emerging” for decades. Remember to dig into your fund’s portfolio allocation, to be sure you are comfortable with what you are buying. (click to enlarge) See the table below for a perfect case in point. This is the geographic distribution of Vanguard’s FTSE Emerging Market ETF. A full 28.2% of the portfolio is comprised of businesses based in China, and 55.3 percent of the portfolio’s companies are based in China, Taiwan, or India. I would prefer if the percentage of companies from those three countries was reduced somewhat, but overall I feel the diversification achieved by this fund fits my family’s needs pretty well. For my annual expense ratio of 0.15%, I gain exposure to over 2500 different global companies. As a result of the difficulty gathering quality corporate information in many of these emerging economies, I have always used an ETF (and this one specifically) to purchase my desired allocation of emerging market companies. Vanguard Total Bond Market ETF (NYSEARCA: BND ) There is a conversation raging right now about whether or not bond investors are being adequately compensated for the risks present in the bond market. That’s a conversation for another day, although I will note that because I am still in my 30s and interest rates are so painfully low, I have not had any meaningful bond exposure in my portfolio for several years. Clearly this is an individual decision, and every investor is different. If however you would like exposure to more than 7700 bonds, for an annual expense ratio of 0.07%, Vanguard’s Total Bond Market ETF may be for you. As you can see in the three tables below, courtesy of Vanguard’s website, the vast majority of holdings are highly rated bonds. The bonds held in the portfolio are also from a variety of issuers and of varying duration. For simple and straight forward bond market exposure, Vanguard’s Total Bond Market ETF is worth a look. Specialty (Sector, County, and Asset) ETFs It’s amusing sometimes to look at all the different specialty ETFs and mutual funds currently being offered. While the typical investor has no need to invest in many of these funds, they are available if the investor so decides. Two specialty funds that come up in my conversations with readers are listed below, but rest assured that your own imagination is the only limit of fund offerings. If you want to invest in a socially responsible fund that only invests in women owned businesses in the former Soviet Union states, I’m sure there is a fund out there for you. I’m exaggerating to prove a point, but I assure you that there are literally thousands of specialty funds available to you, if you take the time to look for them. Remember that just because these funds exist, doesn’t mean they are worthy of your hard earned capital. Vanguard REIT ETF (NYSEARCA: VNQ ) In the current low interest rate environment, investors have been searching for yield anywhere they can get it. Many investors have turned to corporate dividends and distributions from REITs (real estate investment trusts) or MLPs (master limited partnerships). If you are interested in owning a basket of REITs, Vanguard’s REIT ETF may be for you. For a 0.12% annual expense ratio, you gain exposure to 140+ different REITs. In the graphic below (courtesy of Vanguard’s website) you can see the sector diversification offered within the fund, as well as the top ten fund holdings. (click to enlarge) Vanguard Healthcare ETF (NYSEARCA: VHT ) Many investors are keen to take advantage of long term trends, such as aging demographics, and global healthcare issues. If you are looking for this type of exposure, Vanguard’s Healthcare ETF is worth a look. For a low 0.12% annual expense ratio, you can gain exposure to over 330 companies within the healthcare industry. The distribution of those companies is shown in the graphic (courtesy of Vanguard’s website) below, as are the funds top portfolio holdings. (click to enlarge) In a future article I will write about my asset allocation goals for my portfolio, but I hope this article gave you an idea of several very sold ETFs offered within the Vanguard family of funds. (Other low cost fund families you may want to look at include Fidelity and T. Rowe Price). Given the impressive returns posted by equity markets around the world, I have been hesitant to shift all of our holdings over to passive index ETFs just yet. The reality is that I currently enjoy researching and picking individual stocks. Eventually I will not have the time, or desire, to spend so much time on our investments. At that time, having a core portfolio position in the group of ETFs mentioned here will be my best bet. I took an early step in that direction this summer, following China’s massive sell off, when began accumulating a large position in Vanguard’s Emerging Markets ETF. I still have a long way to go before I reach my desired asset allocations, but I am optimistic that better investment opportunities (and lower prices) will present themselves in the future. Do you hold index funds or ETFs in your portfolio? Why or why not? Disclosure: The only ETF mentioned that I currently own is VWO. I do own individual stocks included in some of the other ETFs. Please consult your investment professional to create an asset allocation mix that meets your specific needs. Mine is a fairly unusual case given my young age and mix of investment holdings. This article is for informational purposes only and should not be considered a recommendation for anyone to buy, sell, or hold any securities. I am not a financial professional. The information above is available at Vanguard.com.