If I’ve learned anything, it’s that a majority of people don’t like to leave their comfort zone — whether that’s dealing with insecurity, seeking a new job or making an investment decision. On that last note, many investors prefer to invest in what they know. While they may know the difference between an ETF and a mutual fund, many prefer to avoid emerging market ETFs.
But is that the wrong call?
For instance, an ETF based on the S&P 500, Dow Jones, or Nasdaq — the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) and the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) — aren’t uncommon. In fact, they’re some of the most popular ETFs in the investment universe. But even venturing out of those names, say into the SPDR S&P Retail (ETF) (NYSEARCA:XRT) or Energy Select Sector SPDR (ETF) (NYSEARCA:XLE), aren’t uncommon either.
After all, we all know Macy’s (NYSE:M), Costco (NASDAQ:COST) and Home Depot (NYSE:HD). In the same light, most of us know BP (NYSE:BP) and Chevron Corporation (NYSE:CVX) — even if upstream and downstream still confuse some people.
What they don’t know though? International policies, currencies and foreign governments. The largest company in the U.S. is Apple Inc. (NASDAQ:AAPL) and any halfway interested investor knows that. But what’s the largest public company in China, Germany, the U.K. or Brazil? Most investors couldn’t tell you that, let alone how the yuan, euro, pound or real is being affected or what the governments’ actions mean for their companies.
Put simply, there’s a lot more questions, concerns and confusion surrounding emerging market ETFs than domestic ETFs.
Is It Wrong to Ignore Emerging Market ETFs?
Yes and no.
I wouldn’t say that investors should ignore emerging market ETFs simply because they don’t know them. That said though, investors shouldn’t invest blindly in emerging market ETFs simply because they feel like they need to.
Last week we took a closer look at three red-hot Chinese stocks: Sogou (NYSE:SOGO), iQiyi (NASDAQ:IQ) and Huya (NYSE:HUYA). I wouldn’t have run into those names if it weren’t for Charlie Munger, Warren Buffett’s right-hand man at Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) saying that American investors tend to ignore opportunities in China because they are unfamiliar with the country, its culture and largely, its businesses.
Sure, most of us are familiar with JD.com (NASDAQ:JD) and Alibaba (NYSE:BABA). After hearing that, I made it a priority to dig a little more into the country, which is when I ran into IQ and SOGO, two of my four best performers of the year, even though I no longer own them after their rocket-ship performance over the past few weeks.
But the point is the same with emerging market ETFs: Because we’re not familiar with something, we shouldn’t blindly throw our hard-earned dollars at it and hope. That being said, nothing is stopping investors from learning a bit more about a country and its top stocks. Nothing holds us back from expanding our knowledge and doing a bit of research.
Bottom Line on Emerging Market ETFs
So clearly the bottom line comes down to one simple thing, right? To buy or not to buy emerging market ETFs.
Unfortunately, there’s no one-size-fits-all. It’s hard not to be bullish on U.S. stocks, given how well the economy is doing right now. Small caps specifically can take advantage of a strong U.S. dollar, a strong economy and a lower tax rate. That being said, the global economy has been doing well too, putting the Ishares Inc/MSCI World IX FD (NYSEARCA:URTH) on track to push to new highs (pictured above).
Pictured below the iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM), which as you can see has been struggling. The blanket coverage is concerning, because not all economies are created equal and there are too many under pressure.
For instance, the iShares S&P Latin America 40 Index (ETF) (NYSEARCA:ILF) has been under pressure, highlighted by the collapse in Venezuela and weakness in the iShares MSCI Brazil Index (ETF) (NYSEARCA:EWZ). After rebounding from its 2016 lows, the VanEck Vectors Russia ETF (NYSEARCA:RSX) has been rolling over and so is Mexico. On the flip side, China, India and Saudi Arabia are doing pretty well.
For me, I like to invest in individual companies. However, because I’m not familiar with many countries’ specific laws, governments and customs, ETFs can be the way to go. In any case, I’d rather invest in the best countries, rather than in broad emerging market ETFs, like the EEM.