The iShares MSCI Emerging Markets Index ETF (EEM) is one of the most popular and liquid exchange traded funds on Wall Street.
This flagship emerging markets ETF has about $36.5 billion in assets under management right now, making it one of the top 10 ETFs by size. And with a recent average of over 60 million shares traded each day, the EEM ETF is second only to the iconic SPDR S&P 500 ETF Trust (SPY) when it comes to volume.
But despite its popularity, the iShares MSCI Emerging Markets Index ETF has had a rough go of it lately. The emerging-markets ETF is basically flat on the year versus about 12% gains for the S&P 500 in the same period, and shares have basically gone nowhere since the beginning of 2010 while developed market equities have gone like gangbusters.
But there are reasons to consider owning the EEM fund or increasing your position in 2015. Here are the top five to consider now:
Emerging Markets Are Cheap: While the U.S. stock market is starting to push above long-term averages in regards to its valuation vs. earnings, emerging market stocks remain super cheap by any measure. According to recent anaylsis by Russ Koesterichover at Market Realist, the Shanghai Composite is trading at just 11.8 times earnings and the broader MSCI Emerging Market Index is just 12.3 times earnings. That’s well below a world average of around 17.7 times earnings. If you’re looking for value, there’s no better place than emerging markets and the China-heavy EEM ETF.
China Pessimism Priced In: Regarding the China focus of the EE — its top components include Tencent Holdings (TCEHY), Ltd, Taiwan Semiconductor Mfg. Co. Ltd. (TSM) and China Mobile Ltd. (CHL) among others — it’s important to note that gross underperformance for Chinese equities in the last few years has caused a bargain opportunity in the region. After all, with major Chinese stocks down by about 23% in the last five years versus a gain of about 90% for the S&P 500 in the same period, it’s clear the negativity has been very much priced in.
Emerging Market Momentum Picks Up: While the long-term trend is ugly, it’s worth noting that China’s Shanghai index is actually up 13% in the last three months to outperform the S&P — and other areas of investment focus including South Africa and Thailand have done pretty well in 2014 to show signs of hope. So while emerging markets certainly aren’t out of the woods, there are reasons to be optimistic going forward based on momentum.
Few Growth Options: With Europe very much at risk of a triple-dip recession and the United States at risk of slowing down as central bank policies tighten in 2015, there aren’t a lot of growth options right now. While there indeed was pain in many emerging markets over the last few years, the bottom line is that the developed world is simply not enjoying a rosy outlook for consumer or business demand in the New Year. That makes emerging markets more attractive by default.
Diversification Is Always Important: Even if you are a bit worried about the performance of emerging markets and the EEM ETF in particular next year, it’s important to remember that a good investment portfolio is diversified. If you have a crystal ball that tells the future, it makes sense to go all-in to a small number investments that will outperform. But for the rest of us, there’s no shame in keeping a diverse group of investments across geographies and asset classes in order to smooth out long-term returns. This is particularly true for investors who “average in” to their positions by buying at regular intervals. After all, nobody can exactly pick a bottom or top … so why not consider moving a little into this emerging markets ETF across 2015 with an eye for diversification and long-term gains even if you’re skeptical about the short-term?
Get more information on the iShares MSCI Emerging Markets Indx (ETF) on the official iShares page for the fund.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at email@example.com or follow him on Twitter via @JeffReevesIP.