By The Sizemore Letter<\/u><\/p>\n
It\u2019s been a rotten year for emerging markets.\u00a0 The iShares MSCI Emerging Markets ETF (<\/span>EEM<\/a>)<\/span><\/b>\u2014the most popular way for investors to play the sector\u2014is down 13% year to date.\u00a0 And several individual country funds have gotten hit a lot harder.\u00a0 The iShares MSCI Brazil ETF (<\/span>EWZ<\/a>)<\/span><\/b> is down 23% year to date, \u00a0and the iShares MSCI Turkey ETF (<\/span>TUR<\/a>)<\/span><\/b> is down a whopping 26%.<\/p>\n Ouch.<\/p>\n A slowdown in China, a political crisis in Turkey, and the Fed\u2019s \u201ctaper scare\u201d combined to mix a lethal cocktail for the sector.\u00a0 But now that the dust has settled, are emerging markets a buy?<\/p>\n Yes.\u00a0 With American stocks looking close to fully-valued, investors are shifting their attention to developed Europe, where valuations are nearly 40% lower<\/a>.\u00a0 And as risk appetites return, I expect them to turn to emerging markets next, where pricing is even better.\u00a0 As measured by their price\/book ratios, emerging markets as a group trade for less than half their pre-2007 valuations<\/a>.<\/p>\n The question is not \u201cwhether\u201d to buy emerging markets but \u201chow.\u201d\u00a0 As a general rule, I\u2019ve avoided the iShares MSCI Emerging Market ETF because I consider it far too heavily weighted to developed markets such as South Korea and Taiwan and to companies that get a large chunk of their revenues from exporting to America and Europe. \u00a0Its underlying index recently started to include Greece<\/a>.<\/p>\n Yes, Greece.\u00a0 While I agree that Greece shouldn\u2019t be classified as a developed market, I don\u2019t see a lot of \u201cemerging\u201d going on there.<\/p>\n Other broad ETFs give better access to the emerging market consumer.\u00a0 One that I use in my asset allocation portfolios<\/a> is the Emerging Global Shares Emerging Market Consumer ETF (<\/span>ECON<\/a>)<\/span>.<\/b>\u00a0 The underlying companies get about 90% of their revenues from selling within their home markets and to other emerging markets.<\/p>\n I continue to recommend ECON as a long-term holding.\u00a0 But there are other ways to slice and dice the emerging markets universe, such as by dividend yield.\u00a0 James P. O\u2019Shaughnessy, the author of What Works on Wall Street<\/i>, wrote a paper<\/a> earlier this year that found that a strategy of buying high-dividend emerging market stocks outperformed the broader emerging market universe by 10.6% per year.\u00a0 Yes, you read that correctly.\u00a0 10.6% per year<\/i>.<\/p>\n If you\u2019re looking for an ETF solution, Emerging Global Shares offers one: the EG Shares EM Dividend High Income ETF (<\/span>EMHD<\/a>)<\/span><\/b>.\u00a0 The portfolio has an eclectic mix of emerging-market stocks you\u2019re not likely to find anywhere else, such as Bangkok Expressway (<\/span>BKENF<\/a>)<\/span>,<\/b> Telecom Egypt<\/b>, and Ford Otomotiv Sanayi<\/b>, Turkey\u2019s local Ford subsidiary.\u00a0 In total, it holds the 50 highest-yielding stocks in the FTSE Emerging All Cap ex Taiwan universe, equally weighted, and is expected to sport a dividend yield around 8% (the shares only recently started trading, so there is no actual dividend history as of this writing).<\/p>\n As attractive as EMHD is as a portfolio diversifier, it\u2019s too thinly traded to buy at this time.\u00a0 Its average daily trading volume is a tiny 4,350 shares.<\/p>\n A more liquid option is the WisdomTree Emerging Markets Equity ETF (<\/span>DEM<\/a>)<\/span>.<\/b>\u00a0 \u00a0DEM is based on a fundamentally weighted index that is comprised of the highest dividend yielding stocks selected from the WisdomTree Emerging Markets Dividend Index.\u00a0 At current prices, DEM yields 4.2% in dividends.<\/p>\n DEM is a little too heavily allocated to basic materials for my liking, and its top two holdings\u2014which collectively make up more than 10% of the portfolio\u2014are Russian oil and gas companies.\u00a0 Still, if nothing else, DEM offers a way to get non-traditional exposure to emerging markets and access to companies you\u2019re not going to get in the more popular emerging market funds.<\/p>\n Disclosures: Sizemore Capital is long ECON. This article first appeared on MarketWatch<\/a>.<\/p>\n Charles Lewis Sizemore, CFA, is the editor of the\u00a0Sizemore Investment Letter<\/a>\u00a0and the chief investment officer of investments firm Sizemore Capital Management.\u00a0Click here<\/a>\u00a0to learn about his top 5 global investing trends and get your copy of \u201cThe Top 5 Million Dollar Trends of 2013.\u201d<\/em><\/p>\n <\/p>\n This article first appeared on Sizemore Insights as Choosing the Right Emerging Market ETF<\/a><\/p>\n