TheDumbMoney (58.47)

Why I Bought the Emerging Markets -- VWO

January 30, 2011 – Comments (7) | RELATED TICKERS: VWO , EEM , SPY

I also posted this as a pitch, as always recently I'm posting it as a blog, too, since I tend to get more comments and criticism here:

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Why an emerging markets ETF:  Instead of purchasing a new stock this month, I am planning to continue my strategy of diversification.  I understand that: 1) the benefits of diversification are less now that all markets appear to be more correlated; 2) emerging markets have had a massive decade-long run and mean reversion may kick in.  However, the reality is that over the next twenty years, these are going to be the markets to be in.  That is true EVEN IF China is a bubble and emerging markets experience a major tanking this week or in the next few years.  Do I think Europe will perform better over the next twenty years?  No.  The U.S.? No.  Japan?  No.  So more money needs to be allocated here.  I was planning to purchase this ETF anyway, but the fact that the Egypt protests, and inflation worries, and international interest rate hikes have tanked the fund (and all emerging stocks) since the start of the new year makes it easier to begin a position, even though it may go down significantly farther in the short term.  At this point its performance compared to the S&P for the last year is about even -- all of 2010's gains have been erased.

Why VWO and not EEM or some other emerging ETF? -- Well, as between VWO and EEM, both cover the whole universe of emerging stocks, all countries.  But VWO's expense ratio is 0.27%, versus EEM's 0.69%.  So why would anyone invest in EEM instead of in VWO?  Good question!  EEM's only selling point apparently is increased liquidity for institutional buyers.  Am I an institutional buyer?  No.  In general, for ETFs one should look to Vanguard first -- theirs are the cheapest.  If they don't have something (as yet, they don't have country-specific funds), then turn to iShares, etc.  This is complicated only by the fact that apparently certain brokers offer EEM at a zero cost basis, absorbing the cost themselves.  As for VWO versus country-specific funds, I should have started with this rather than with BRF.  As far as I'm concerned, a low-cost generalist Vanguard ETF or mutual fund is the best and safest place for a real life investor to start investing in emerging markets stocks.  Do I REALLY know enough about emerging markets to know that Brazil is the best place to start?  No.  Is that my gut reaction?  Sure, but in case I'm wrong, I'm moving to this instead, while maintaining the BRF position I previously initiated.

I am opening a very small position.  I continue to think quality large-cap U.S. stocks offer the most value at this time, in any market anywhere in the world.  However, over the next three to five years I intend to slowly dollar-cost-average my way into a variety of emerging markets stocks, mainly via ETFs, though I may invest in a few individual companies as well.