About to invest in emerging markets

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Settlement
Posts: 43
Joined: Wed Aug 12, 2015 12:17 am

About to invest in emerging markets

Post by Settlement » Sat Oct 24, 2015 3:50 am

Hi all,

I'm 25. My portfolio is 80% stocks, 20% cash, + 6 months living expenses.
Within the 80% stocks I have 75% MSCI World and want to invest the other 25% in EM.

I haven't bought into an EM ETF yet but was thinking of Comsgage EM which has a TER of 0.25%. I believe it is a synthetic fund.

Thoughts on this? Will be investing in € with degiro from my irish bank account but am currently australian resident

User avatar
in_reality
Posts: 4529
Joined: Fri Jul 12, 2013 6:13 am

Re: About to invest in emerging markets

Post by in_reality » Sat Oct 24, 2015 4:56 am

Settlement wrote:Hi all,

I'm 25. My portfolio is 80% stocks, 20% cash, + 6 months living expenses.
Within the 80% stocks I have 75% MSCI World and want to invest the other 25% in EM.

I haven't bought into an EM ETF yet but was thinking of Comsgage EM which has a TER of 0.25%. I believe it is a synthetic fund.

Thoughts on this? Will be investing in € with degiro from my irish bank account but am currently australian resident
It's a fine plan.

What's your goal? Overweight EM? Stick to mid and large caps? Cheaply overweight EM and stick to large and mid caps?

At 0.40% TER there is SPDR® MSCI ACWI IMI UCITS ETF (EUR) | SPYI

It has small cap stocks too (which usually means a higher TER) and weight EM at 12.7%

see https://www.aperiogroup.com/resource/151/node/download

So your plan is overweight EM and leave out small caps. It seems fine to me. I like the SPYI fund as it has 7.5% small caps. Then again, US small caps might be a little expensive these days and so overweighting EM may actually do better.

Not sure if SPYI is on your exchange or if there are cheaper alternatives. Not in Europe myself...

Valuethinker
Posts: 36314
Joined: Fri May 11, 2007 11:07 am

Re: About to invest in emerging markets

Post by Valuethinker » Sat Oct 24, 2015 9:48 am

Settlement wrote:Hi all,

I'm 25. My portfolio is 80% stocks, 20% cash, + 6 months living expenses.
Within the 80% stocks I have 75% MSCI World and want to invest the other 25% in EM.

I haven't bought into an EM ETF yet but was thinking of Comsgage EM which has a TER of 0.25%. I believe it is a synthetic fund.

Thoughts on this? Will be investing in € with degiro from my irish bank account but am currently australian resident
Australian stock market and economy has an unusually large correlation with EM. In fact Australia is a rich country,that is also an EM, in some senses.

hafius500
Posts: 217
Joined: Sat Sep 10, 2011 4:31 pm

Re: About to invest in emerging markets

Post by hafius500 » Sat Oct 24, 2015 6:48 pm

I haven't bought into an EM ETF yet but was thinking of Comsgage EM which has a TER of 0.25%. I believe it is a synthetic fund.
I haven't heard of a Comsgage fund, but a Comstage EM ETF exists.

Note that this Comstage ETF is an accumulating synthetic fund while the quoted SPDR ETF is an accumulating physical fund.
The taxation can be very different.
prior username: hafis50

Settlement
Posts: 43
Joined: Wed Aug 12, 2015 12:17 am

Re: About to invest in emerging markets

Post by Settlement » Sat Oct 24, 2015 8:26 pm

in_reality wrote:
Settlement wrote:Hi all,

I'm 25. My portfolio is 80% stocks, 20% cash, + 6 months living expenses.
Within the 80% stocks I have 75% MSCI World and want to invest the other 25% in EM.

I haven't bought into an EM ETF yet but was thinking of Comsgage EM which has a TER of 0.25%. I believe it is a synthetic fund.

Thoughts on this? Will be investing in € with degiro from my irish bank account but am currently australian resident
It's a fine plan.

What's your goal? Overweight EM? Stick to mid and large caps? Cheaply overweight EM and stick to large and mid caps?

At 0.40% TER there is SPDR® MSCI ACWI IMI UCITS ETF (EUR) | SPYI

It has small cap stocks too (which usually means a higher TER) and weight EM at 12.7%

see https://www.aperiogroup.com/resource/151/node/download

So your plan is overweight EM and leave out small caps. It seems fine to me. I like the SPYI fund as it has 7.5% small caps. Then again, US small caps might be a little expensive these days and so overweighting EM may actually do better.

Not sure if SPYI is on your exchange or if there are cheaper alternatives. Not in Europe myself...
Thanks. Yes, happy to overweight EM and leave out small caps.

Valuethinker wrote:
Settlement wrote:Hi all,

I'm 25. My portfolio is 80% stocks, 20% cash, + 6 months living expenses.
Within the 80% stocks I have 75% MSCI World and want to invest the other 25% in EM.

I haven't bought into an EM ETF yet but was thinking of Comsgage EM which has a TER of 0.25%. I believe it is a synthetic fund.

Thoughts on this? Will be investing in € with degiro from my irish bank account but am currently australian resident
Australian stock market and economy has an unusually large correlation with EM. In fact Australia is a rich country,that is also an EM, in some senses.
Thanks for response. I see. Should this change my investment plan?
hafius500 wrote:
I haven't bought into an EM ETF yet but was thinking of Comsgage EM which has a TER of 0.25%. I believe it is a synthetic fund.
I haven't heard of a Comsgage fund, but a Comstage EM ETF exists.

Note that this Comstage ETF is an accumulating synthetic fund while the quoted SPDR ETF is an accumulating physical fund.
The taxation can be very different.
Thanks. That was a typo. Can you explain in more detail the taxation differences?

daffyd
Posts: 190
Joined: Sun Sep 29, 2013 11:51 pm
Location: Australia

Re: About to invest in emerging markets

Post by daffyd » Sat Oct 24, 2015 8:38 pm

Is there a problem with Vanguard FTSE Emerging Markets UCITS ETF (VFEM) ?

Also charges 0.25% p.a. and holds physical assets (reducing counterparty risk).

If you are an Australian resident then Australia will tax you on your worldwide income (although foreign tax credits can avoid or mitigate double taxation). I have no real idea of the tax treatment of accumulating funds here but I would be wary (for example, if I recall correctly my understanding is that for inflation-linked bonds an increase in principal value would be taxable annually). There is a risk you could be subject to taxation of the (capitalised) dividends in Australia and then if you sell when in another tax jurisdiction would find it hard to avoid capital gains tax on the full increase.

Settlement
Posts: 43
Joined: Wed Aug 12, 2015 12:17 am

Re: About to invest in emerging markets

Post by Settlement » Sun Oct 25, 2015 12:35 am

daffyd wrote:Is there a problem with Vanguard FTSE Emerging Markets UCITS ETF (VFEM) ?

Also charges 0.25% p.a. and holds physical assets (reducing counterparty risk).

If you are an Australian resident then Australia will tax you on your worldwide income (although foreign tax credits can avoid or mitigate double taxation). I have no real idea of the tax treatment of accumulating funds here but I would be wary (for example, if I recall correctly my understanding is that for inflation-linked bonds an increase in principal value would be taxable annually). There is a risk you could be subject to taxation of the (capitalised) dividends in Australia and then if you sell when in another tax jurisdiction would find it hard to avoid capital gains tax on the full increase.
Vanguard are US based - does this not mean I will lose money as I would be converting my € to dollar to buy?

daffyd
Posts: 190
Joined: Sun Sep 29, 2013 11:51 pm
Location: Australia

Re: About to invest in emerging markets

Post by daffyd » Sun Oct 25, 2015 5:52 am

According to their webpage there is a euro listed version also:
https://www.vanguard.co.uk/uk/portal/de ... ##overview

User avatar
BeBH65
Posts: 1267
Joined: Sat Jul 04, 2015 7:28 am

Re: About to invest in emerging markets

Post by BeBH65 » Sun Oct 25, 2015 9:21 am

Hello,

There is a wiki page related to investing from europe: https://www.bogleheads.org/wiki/EU_investing.
This page also provides a discussion on 'base currency vs trading currency' and has links to the major etf providers; next to the Vanguard ETF, you might also want to look at the Ishares EM etf with ISIN IE00BKM4GZ66, also with an ER of 0,25%.
The page on https://www.bogleheads.org/wiki/Synthetic_ETF starts to explain the risk of such ETFs as compared to replicating ETFs.

Regards,

BeBH65
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

Settlement
Posts: 43
Joined: Wed Aug 12, 2015 12:17 am

Re: About to invest in emerging markets

Post by Settlement » Fri Oct 30, 2015 9:00 pm

Amundi has the lowest TER at 0.2% - any thoughts on this?

small_index
Posts: 631
Joined: Sun Aug 16, 2015 2:47 am

Re: About to invest in emerging markets

Post by small_index » Fri Oct 30, 2015 10:06 pm

Just to revisit another poster's point, 33% of Australia's exports are to China, which is also the biggest emerging market country. If China slows (as it did recently), is your job in Australia at risk?

You may be getting less diversification than you expect by investing in Pacific (Japan is a major export partner as well, 18%) or emerging market funds owing to Australia's trade.

User avatar
BeBH65
Posts: 1267
Joined: Sat Jul 04, 2015 7:28 am

Re: About to invest in emerging markets

Post by BeBH65 » Sat Oct 31, 2015 7:42 am

Not sure which exact Amundi ETF you are proposing. Many Amundi Etf's are synthetic, this might also be the case for the one you selected.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

Settlement
Posts: 43
Joined: Wed Aug 12, 2015 12:17 am

Re: About to invest in emerging markets

Post by Settlement » Sat Oct 31, 2015 7:42 am

Thanks for response. I am a doctor in Australia so I don't think my job is at risk, market downturns don't really effect my job prospects I think.

I don't get the point about emerging markets. I understand that Australia is linked to China which is doing poorly but how does my investing in emerging markets have to do with this? I'm investing in € from an Irish bank account if that makes a difference

Settlement
Posts: 43
Joined: Wed Aug 12, 2015 12:17 am

Re: About to invest in emerging markets

Post by Settlement » Sat Oct 31, 2015 7:43 am

BeBH65 wrote:Not sure which exact Amundi ETF you are proposing. Many Amundi Etf's are synthetic, this might also be the case for the one you selected.
This one: https://www.justetf.com/en/etf-profile. ... 0010959676

It's synthetic. Are you opposed to that?

User avatar
BeBH65
Posts: 1267
Joined: Sat Jul 04, 2015 7:28 am

Re: About to invest in emerging markets

Post by BeBH65 » Sat Oct 31, 2015 10:14 am

From the Wiki page: "A synthetic ETF is an investment that mimics the behavior of an exchange-traded fund (ETF) through the use of derivatives such as swaps". As such the etc does not really invest in the actual stocks. This brings some extra risks. The wiki page mentions the following: counterparty risk, collateral risk, liquidity risk and conflicts of interest.

For these reasons I personally prefer to hold the replicating ishares emerging market etf (ticker=EMIM) with the slight higher ER of 0,25%.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

Settlement
Posts: 43
Joined: Wed Aug 12, 2015 12:17 am

Re: About to invest in emerging markets

Post by Settlement » Sat Oct 31, 2015 7:05 pm

The iShares I can see have a TER of 0.68%

https://www.justetf.com/en/etf-profile. ... rom=search

Can you link the ones you are talking about?

User avatar
BeBH65
Posts: 1267
Joined: Sat Jul 04, 2015 7:28 am

Re: About to invest in emerging markets

Post by BeBH65 » Sun Nov 01, 2015 1:51 am

Hello,

Justetf has the page here.
The U.K. Site of iShares has the following page.
On Morningstar you can often find research; look at the bottom for info on costs and alternatives.


Regards,
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

Settlement
Posts: 43
Joined: Wed Aug 12, 2015 12:17 am

Re: About to invest in emerging markets

Post by Settlement » Sun Nov 01, 2015 3:11 pm

Thanks, that's very helpful. What's the difference between that one and the ishares etf I linked? Apart from the TER

Settlement
Posts: 43
Joined: Wed Aug 12, 2015 12:17 am

Re: About to invest in emerging markets

Post by Settlement » Sun Nov 01, 2015 3:32 pm

Also, since I'm already invested in ishares msci world etf, does it confer a benefit to diversify over several etf providers? Eg, to buy an amundi em etf instead of ishares em etf?

User avatar
BeBH65
Posts: 1267
Joined: Sat Jul 04, 2015 7:28 am

Re: About to invest in emerging markets

Post by BeBH65 » Sun Nov 01, 2015 4:01 pm

I believe one of the main difference between the two IShares funds is that the cheaper one invest in the full investible market "IMI", including smallcaps; and consequently includes about double as many stocks. More info can be found on sites justetf and morningstar. They both give the possibility to compare funds side by side. Of course the only formal description is in the prospectuses that can be found on the Ishares site.

I have no particular opinion on mixing different fund providers, as long as the content of the funds is correct. (Personally I would not select the one from Amundi as it is synthetic). Care has to be taken when mixing different indexproviders (e.g. MSCI vs. FTSE) as the defintions are sometimes slightly different. E.g. If I remember correctly South-Korea is considered emerging by one and developed by the other. So you might either have double exposure to that country, or none at all.

Not sure if you are taxed in Australia or Ireland. As mentioned by one of the previous posters you should look into the tax treatment that is applicable to you. The Ishares are accumulating (=reinvesting) dividends. If you need to declare these dividends in the country where you pay taxes then this might become difficult and dividend distributing etf's might be preferable.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

Settlement
Posts: 43
Joined: Wed Aug 12, 2015 12:17 am

Re: About to invest in emerging markets

Post by Settlement » Sun Nov 01, 2015 9:18 pm

Thank you beBh, excellent advice.

What's your particular reason for avoiding synthetic etf? Or just the various risks such as counterparty etc as mentioned before.

As regards tax, I will be taxed by both Ireland and Australia this year. I have researched extensively and have been unable to get a straight answer as taxation laws are complex, but all I could conclude is that accumulating ETFs are less likely to lead to high taxation. The other conclusion is that since I don't know the full details, and since its better to invest than not to invest, I will invest with accumulating funds and find out about taxation when it happens.

User avatar
BeBH65
Posts: 1267
Joined: Sat Jul 04, 2015 7:28 am

Re: About to invest in emerging markets

Post by BeBH65 » Mon Nov 02, 2015 5:51 am

Hi,

Personally i do not understand synthetic etfs enough to invest my money in it.

In my (simple) understandingthe fund provider does not really hold the stocks of the index, but gives 'our' money to another party who 'promises' to provide a return similar to the index. I read words like swaps, derivatives, futures, options etc, that I don't understand.

The questions that I have are multiple: Who is this counterparty? How close will the up and downs of the index be followed? How am i guaranteed that i can get my money back when i sell my fund?

Too many questions for me to invest in it, even though the trackrecord often seems good.

Regards,
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

Settlement
Posts: 43
Joined: Wed Aug 12, 2015 12:17 am

Re: About to invest in emerging markets

Post by Settlement » Wed Nov 04, 2015 6:31 pm

Thanks BeBH65, very helpful!

Post Reply