To say that emerging markets have been all the rage since 2003 — when it became clear the United States and most other well-developed economies were no longer sure things — would be an understatement.
Many of these countries were entering their economic heydays with such velocity that they looked capable of overcoming the global malaise. And the iShares MSCI Emerging Markets ETF (EEM) and the Vanguard FTSE Emerging Markets ETF (VWO) have both grown their asset bases to more than $40 billion in the wake of emerging markets mania.
A lot can happen in 10 years, however.
That includes which countries are even classified as “emerging”; many of them are now fully “emerged.” The problem is, the fund industry in many cases has been slow to update their EM holdings to reflect the global economy’s 10-year transition.
So … are you sure that your emerging markets fund is doing its job?
Time to Recategorize Emerging Markets
A word to the wise: China is hardly an emerging market any longer. It rivals the U.S. as the world’s dominant single economic superpower, and other countries are just as eager to trade with it as they are with the U.S. And yet, it’s the single-most represented country in both the iShares and Vanguard emerging markets ETFs; Chinese stocks make up 18% and 21.5% of their respective portfolios.
Not that there’s no opportunity in Chinese stocks. Even though China’s economy growth rate has slowed over the past five years, that reduction from has been from a stunning 10% then to a still-amazing 7% now.
But that cat’s well out of the bag — everyone knows about China now.
And it’s not like China’s now-misplaced outsized allocation is the only proverbial square peg in a round emerging market hole.
For instance, Brazil accounts for 14% of VWO and 11% of EEM — and that’s also off-base from an emerging markets perspective, as Brazil is now the world’s sixth-biggest economy (by GDP), displacing the United Kingdom.
South Korea and Taiwan are also well-represented by most emerging markets funds, and while you could argue both still are emerging market-esque, that’s still pushing the envelope.
Those are hardly the only examples of countries that would surprise investors to learn how big and progressively developed they really are. Case in point: Indonesia. Contrary to popular belief, Indonesia is anything but a third-world nation just now picking up on electricity and telephones. Indonesia is the world’s fourth-biggest country by population, it’s the sixteenth-largest economy, and it’s home to the world’s fifth-greatest number of Facebook (FB) users.
Point being, if you’re holding an emerging markets fund to capitalize on high-growth opportunities that few others recognized, that ship has largely sailed for the most heavily owned nations within most EM funds’ portfolios. Anymore, an investment in those ETFs is an investment in a country closely linked to the United States’ economy.
It’s time for some fresh meat.
Global X has it.