Do you overweight emerging markets?

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Clearly_Irrational
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Re: Do you overweight emerging markets?

Post by Clearly_Irrational » Wed Oct 10, 2012 11:46 am

yobria wrote:Interesting to see so many folks overweighting EM at the expense of developed. I don't think a 2X overweight is harmful (50/50 EM/Developed). On the other hand, ignoring this important source of diversification would be a foolish mistake. Certainly financial advisors who did wound up costing their clients a lot of money.
Personally I just don't think ex-US developed is enough different from the US to be worth it.

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Re: Do you overweight emerging markets?

Post by harikaried » Wed Oct 10, 2012 12:08 pm

Clearly_Irrational wrote:Personally I just don't think ex-US developed is enough different from the US to be worth it.
I wonder if similar logic should be applied to the relative weighting of largecap-to-smallcap as developed-to-emerging?

E.g., if largecap should be 2x smallcap, developed should be 2x emerging. So assuming ex-US developed is given equal weight to US, this results in..

developed = 2x emerging
developed = ex-US + US
ex-US = US
largecap = 2x smallcap
US = largecap + smallcap

Or base unit of smallcap:
smallcap = 1x smallcap
largecap = 2x smallcap
US = ex-US = 3x smallcap
emerging = 3x smallcap
developed = 6x smallcap

Or as fraction of equities:
smallcap = 1/9
largecap = 2/9
ex-US = 1/3
emerging = 1/3

Or in the usual way of reporting:
Equities = 1/3 US, 2/3 Intl
US = 1/3 smallcap, 2/3 largecap
Intl = 1/2 ex-US developed, 1/2 emerging

Or in words: Equal weighting of US, ex-US developed, and emerging markets where within US, weight largecap to smallcap at the same ratio as developed to emerging.

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Re: Do you overweight emerging markets?

Post by Jerry_lee » Wed Oct 10, 2012 12:43 pm

yobria wrote:
Bungo wrote:My international allocation is 50% emerging, 50% developed. I have no idea which of these will perform better over the next few decades, so anything other than 50/50 seems unwarranted.
Of course you could make that claim about any arbitrary division of the global market. I have no idea whether a company in Germany will underperform its competitor in India, so it's hard to see how under- or overweighting one is warranted.
Obviously this is not true, as my data above shows. All developed markets have the same risk and expected return, with very high correlations across Total Stock Indexes (Russell and MSCI World exUS) due to the large growth nature of their holdings. So adding Int'l developed to US results in very minimal risk/return differences. In effect, it is a hedge against a prolonged slump for US equities similar to what we've seen in Japan. Of course, small/value tilts accomplish this as well with higher expected returns, but that is another story.

But Emerging Markets are riskier than Developed Markets, and therefore should have a higher return. Data is limited, and there is the issue of EM stocks having extremely high earnings growth rates (which means, similar to growth stocks, they have lower expected returns), but given the extremely high volatility of EM vs Developed, it appears political and illiquidity/market concentration risks are priced more predominantly than earnings growth. So by adding EM to developed, you get a bit more risk, a bit more expected return, and some diversification benefit. But, really, at 10% of a portfolio, its not a huge deal.

Now, there was a reference above to my point about excluding EM stocks from a portfolio. As I showed previously, if you are swapping EM for developed small cap value, then that is just trading one risk for another, and should produce similar returns. For those who don't want EM, developed small value is an alternative. To look at live funds over a short period that Nick has repeatedly referred to (since 9/09-9/12), lets look at two allocations.

#1 is my "starting point":
20% S&P 500
20% US Large Value
20% US Small Value
10% Int'l Value
10% Int'l Small Value
10% EM Value

#2 is a way to get similar expected returns to #1 w/o EM:
20% S&P 500
20% US Large Value
35% US Small Value
10% Int'l Large Value
15% Int'l Small Value

#2 obviously just trades the riskier EM Value stocks (large/medium/small) in #1 for riskier developed SV stocks. Over the last 3 years, we see the following risk/return for #1 and #2:

#1
ret. = +10.4%
SD = 20.3

#2
ret. = +10.6%
SD = 20.3

So the portfolio w/o EM actually came out a bit ahead during this period, but other short periods will come to different conclusions.

Investors can make the same decisions with EAFE Value, EAFE Small, and MSCI EM. There is more of a benefit of EM Small (inside VSS), but that is a small part of a portfolio so skipping small or value can be understood. And sticking with just EAFE Value or EAFE Small and avoiding EM isn't a big deal if you want simplicity. May help you, may hurt you, but not by much either way.

No, the big things to stay away from, as I've repeated before, isn't EM vs no-EM (controlling for risk), it is making huge allocation shifts around market turning points, like loading up on the S&P 600 Pure Value Index in 2007 only to dump it in favor of TSM in 2009. That is devastating. The small improvement(not exactly "foolish" or "very costly") in returns over the last few years from avoiding EM? Noise, and something I'd advise against unless you just cannot get comfortable with emerging economies in your portfolio. I don't know anyone I work with off the top of my head that isn't 10% of equities in EM. Seems the most logical allocation whether you are 30% Int'l (then you are a bit overweight to EM relative to World Mkt) or 40% EM (then 10% is 1/4 and approximately the non-US World weighting). >10% and we are talking about some pretty serious increases in portfolio volatility.
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Re: Do you overweight emerging markets?

Post by zotty » Wed Oct 10, 2012 2:16 pm

I just go with whatever is in TISM.

I find it hard to believe that EM will decouple from the developed world for extended periods of time. Maybe it's enough to get a rebalancing bonus, i don't know. Exporters export things. they need buyers. To me, whatever growth bonus is available will get soaked up by local capitalists, and investors will get the left overs.

The "Stodgey" Total International Index is good enough for me. I could be wrong, of course.
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Re: Do you overweight emerging markets?

Post by abuss368 » Wed Oct 10, 2012 2:41 pm

zotty wrote:I just go with whatever is in TISM.

That is what we do as well. Total International Index Fund - now with quarterly dividends.

Now if only the expense ratio would decrease even more!
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Re: Do you overweight emerging markets?

Post by yobria » Wed Oct 10, 2012 3:59 pm

Clearly_Irrational wrote:
yobria wrote:Interesting to see so many folks overweighting EM at the expense of developed. I don't think a 2X overweight is harmful (50/50 EM/Developed). On the other hand, ignoring this important source of diversification would be a foolish mistake. Certainly financial advisors who did wound up costing their clients a lot of money.
Personally I just don't think ex-US developed is enough different from the US to be worth it.
I value maximum economic diverisification more than how "different" each country may be from the US. But addressing that point, I have no idea if Spanish stocks, say, will be more different than Taiwanese stocks going forward. The world is certainly a very different place than 20 years ago, with some developed countries at risk of being relabelled emerging, and EMs moving steadily toward/into the developed category. There are certainly a lot of export driven EM companies that catch a cold when the US sneezes.

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Re: Do you overweight emerging markets?

Post by Clearly_Irrational » Wed Oct 10, 2012 4:08 pm

yobria wrote:I value maximum economic diverisification more than how "different" each country may be from the US.
I understand your point, but my portfolio is based on the idea of having a small collection of sharply divergent assets. (at least the most divergent ones I can find) "Economic Diversification" as you put it only guards against certain kinds of risks and I feel like I'm already pretty well guarded against those so further moves down that path have significantly diminished advantages.
yobria wrote:But addressing that point, I have no idea if Spanish stocks, say, will be more different than Taiwanese stocks going forward. The world is certainly a very different place than 20 years ago, with some developed countries at risk of being relabelled emerging, and EMs moving steadily toward/into the developed category. There are certainly a lot of export driven EM companies that catch a cold when the US sneezes.
By no means am I trying to say that EM stocks are in isolation from the world economy, but they do tend to have different fundamental drivers and problems than those of the developed world. I feel that leads to lower correlation over the long term, and of course we know that lower correlation combined with good expected return and reasonable SD tends to help your portfolio control for dispersion risk.

I'm not saying this strategy is for everyone, but given my objectives and tolerances it makes sense.

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Re: Do you overweight emerging markets?

Post by pingo » Wed Oct 10, 2012 5:10 pm

Thank you all for your discussion. It is timely given that I have heretofore been without EM and International Small Caps in my employer plan. I am now at a point where my employer's additional account fee for a Schwab PRCA/SDB will be reversed by Schwab's low expense ETFS.

Cheers!
abuss368 wrote:Now if only the expense ratio would decrease even more!
Maybe you'll get your wish ones the dust settles from Vanguard's change to CRSPI's? One can hope!

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Re: Do you overweight emerging markets?

Post by yobria » Wed Oct 10, 2012 5:20 pm

Clearly_Irrational wrote:
yobria wrote:I value maximum economic diverisification more than how "different" each country may be from the US.
I understand your point, but my portfolio is based on the idea of having a small collection of sharply divergent assets. (at least the most divergent ones I can find) "Economic Diversification" as you put it only guards against certain kinds of risks and I feel like I'm already pretty well guarded against those so further moves down that path have significantly diminished advantages.
yobria wrote:But addressing that point, I have no idea if Spanish stocks, say, will be more different than Taiwanese stocks going forward. The world is certainly a very different place than 20 years ago, with some developed countries at risk of being relabelled emerging, and EMs moving steadily toward/into the developed category. There are certainly a lot of export driven EM companies that catch a cold when the US sneezes.
By no means am I trying to say that EM stocks are in isolation from the world economy, but they do tend to have different fundamental drivers and problems than those of the developed world. I feel that leads to lower correlation over the long term, and of course we know that lower correlation combined with good expected return and reasonable SD tends to help your portfolio control for dispersion risk.

I'm not saying this strategy is for everyone, but given my objectives and tolerances it makes sense.
Yep, get what you're going for. My opinion is that, say, Brazil and Japan certainly have differing unique risks, but I expect to be compensated for each, and don't see a reason to bet on either one. Ultimately either strategy is fine, as both are taking advantage of this asset class.

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Re: Do you overweight emerging markets?

Post by garlandwhizzer » Wed Oct 10, 2012 5:56 pm

Clearly_Irrational wrote: Personally I just don't think ex-US developed is enough different from the US to be worth it.
Good point, totally agree. EM offers diversification benefits relative to US equities over and above developed international which often move in lock step to a closer degree with US. EM has its own very different risk/reward scenario than either US or EM.

As for Yobria's point that EMs are dependent on US consumer, that when we sneeze they get sick. This has certainly been the case in the past, but we're not investing in the past but for the future. It is important to recall that the US middle class is shrinking, while the EM middle class is growing by leaps and bounds. More automobiles were sold in China last year than in the US. China last year surpassed the US as the number one market for luxury goods in the world. In my opinion, the EM story going forward will be one of increasing domestic EM demand replacing decreasing demand from developed countries. Currently they are going through a bumpy transition into this new reality. I believe it will gain more traction next year and I feel that EMs are going to be the major source of world economic growth for at least a decade to come.

I could be wrong, of course, but at current EM PEs I'm willing to accept the risk/reward tradeoff. I think TISM, being so diversified, is a safer, less volatile choice with acceptable long term results (which, however, I think are unlikely to surpass TSM), and I wouldn't suggest that others abandon it because EM equity is a roller coaster.

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Re: Do you overweight emerging markets?

Post by larryswedroe » Wed Oct 10, 2012 6:34 pm

Haven't the time to read the whole thread but wanted to make these comments
a) EM clearly more risky, banking systems typically weaker and political risks greater, and even risks of currency controls exist, so higher expected returns
B)EM more expensive to trade, much more expensive and markets demand liquidity premiums, so again higher expected returns
c) weaker banking systems and risks of currency flight argue for sizable small and value premiums
d) correlation of EM, EMS and EMV are all well above 90 last time I looked, so if going to take EM risk might as well take risk of EMS and/or EMV and earn the risk premiums (and maybe allow for less beta exposure)
e) the big pop from EM can come when EM becomes developed and risk premiums drop sharply
F) best to hold EM in a "core" type fund to reduce costs of rebalancing and also tax costs when a country moves from EM to developed. BTW--DFA is announcing a new core fund, combining ISV and EM (basically will be EMSV) and it will minimize taxes by not taking ST gains and watching securities lending revenue to not exceed ER

Hope that is helpful
Larry

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Re: Do you overweight emerging markets?

Post by Noobvestor » Wed Oct 10, 2012 6:43 pm

zotty wrote:I just go with whatever is in TISM.

I find it hard to believe that EM will decouple from the developed world for extended periods of time.
Did you see the 20-year chart I posted on the previous page? Seriously decoupling over the last two decades - a long underperformance by EM, followed by a large underperformance by TSM.

What I will say about the pro-EM poster citing GDP growth as a reason to go with EM: historically, there has been a slightly negative correlation between GDP growth and stock market returns - more growth != better returns, in other words. For me, at least, it seems a bit like market timing, too, to use that as the basis for decisions either way.
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Re: Do you overweight emerging markets?

Post by madbrain » Wed Oct 10, 2012 11:19 pm

Clearly_Irrational wrote:
yobria wrote:Interesting to see so many folks overweighting EM at the expense of developed. I don't think a 2X overweight is harmful (50/50 EM/Developed). On the other hand, ignoring this important source of diversification would be a foolish mistake. Certainly financial advisors who did wound up costing their clients a lot of money.
Personally I just don't think ex-US developed is enough different from the US to be worth it.
A very significant share of market cap of "ex-US" is Europe, and that region certainly has had its own distinct set of risks with the ongoing story of the euro, and will probably continue to have them.
One could argue it's more of a negative, but it's certainly a differentiator .

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Re: Do you overweight emerging markets?

Post by pingo » Thu Oct 11, 2012 12:00 am

Larry:

My apologies, but I do not follow. You say:
larryswedroe wrote:d)...if going to take EM risk might as well take risk of EMS and/or EMV and earn the risk premiums (and maybe allow for less beta exposure)
...and then say:
larryswedroe wrote:F) best to hold EM in a "core" type fund to reduce costs of rebalancing and also tax costs when a country moves from EM to developed.
Perhaps I do not understand the use of "core" type fund, here. I would understand Vanguard Total International to be a core fund. Or, someone else could clarify as well?

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Re: Do you overweight emerging markets?

Post by ClosetIndexer » Thu Oct 11, 2012 1:49 am

pingo wrote:Larry:

My apologies, but I do not follow. You say:
larryswedroe wrote:d)...if going to take EM risk might as well take risk of EMS and/or EMV and earn the risk premiums (and maybe allow for less beta exposure)
...and then say:
larryswedroe wrote:F) best to hold EM in a "core" type fund to reduce costs of rebalancing and also tax costs when a country moves from EM to developed.
Perhaps I do not understand the use of "core" type fund, here. I would understand Vanguard Total International to be a core fund. Or, someone else could clarify as well?
I guess Larry is saying that ideally you would have access to broad tilted 'core' funds, like those offered by DFA. These cover both developed and emerging markets, while offering small and value tilts.

And forget about rebalancing and tax costs; any small or value tilted EM funds I've seen have had absolutely horrific tracking errors too.

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Re: Do you overweight emerging markets?

Post by postema » Thu Oct 11, 2012 2:03 am

45% of my port is international. Of that 20% developed , 20% emerging and 5% as a subset is allocated to frontier markets.

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Re: Do you overweight emerging markets?

Post by larryswedroe » Thu Oct 11, 2012 7:55 am

Pingo
Yes Vanguard total international is a core fund that combines two asset classes, EM and developed. That has major benefits, especially for taxable accounts
First, the funds rebalance for you, saving possible transactions costs and taxes.
Second, you avoid the large transactions costs and taxes that would occur if a stock shifted from EM to developed.
That is what I meant by a core fund.
But I also think if going to take EM risk might as well go to EMS and EMV as the correlations are almost 100%, so might as well seek the premium and earn higher expected returns or use that to lower beta exposure.
Especially true since most have low EM exposure in first place. Take typical 60% equity allocation. Say it's even 40% international, and that 1/4 is EM (which would be market cap weighting roughly) that's 10% of portfolio.
I own only EMV
Hope that clarifies
Larry

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Re: Do you overweight emerging markets?

Post by Clearly_Irrational » Thu Oct 11, 2012 11:04 am

madbrain wrote:A very significant share of market cap of "ex-US" is Europe, and that region certainly has had its own distinct set of risks with the ongoing story of the euro, and will probably continue to have them.
One could argue it's more of a negative, but it's certainly a differentiator .
That would depend on your time horizon. For anything less than a decade I agree with you, however over the long term they're going to be pretty similar due to underlying factors. Although I attempt to avoid market timing, I will act on macro knowledge if it's ridiculously obvious, and in this case Europe is a basket case until they solve their fixed currency without fiscal union problem which so far they're completely messing up.

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Re: Do you overweight emerging markets?

Post by Clearly_Irrational » Thu Oct 11, 2012 11:05 am

postema wrote:45% of my port is international. Of that 20% developed , 20% emerging and 5% as a subset is allocated to frontier markets.
I could really find a frontier market fund I liked, so far they all seem to be very regional.

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Re: Do you overweight emerging markets?

Post by Noobvestor » Thu Oct 11, 2012 11:54 am

Clearly_Irrational wrote:
postema wrote:45% of my port is international. Of that 20% developed , 20% emerging and 5% as a subset is allocated to frontier markets.
I could really find a frontier market fund I liked, so far they all seem to be very regional.
You may find this interesting. Note: I don't own it.

http://seekingalpha.com/article/875391- ... ly-arrives

http://us.ishares.com/product_info/fund/overview/FM.htm
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Re: Do you overweight emerging markets?

Post by Clearly_Irrational » Thu Oct 11, 2012 12:07 pm

Noobvestor wrote:
Clearly_Irrational wrote:
postema wrote:45% of my port is international. Of that 20% developed , 20% emerging and 5% as a subset is allocated to frontier markets.
I could really find a frontier market fund I liked, so far they all seem to be very regional.
You may find this interesting. Note: I don't own it.

http://seekingalpha.com/article/875391- ... ly-arrives

http://us.ishares.com/product_info/fund/overview/FM.htm
Way too heavy a weighting to financials and not nearly enough individual stocks to be representative of so many economies. If and when I see a decent choice I may have re-evaluate my setup, but so far it doesn't seem that there are any good options.

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Re: Do you overweight emerging markets?

Post by postema » Thu Oct 11, 2012 5:00 pm

While it is a new fund it has great family roots. WAFMX is the option I opted for for my frontier exposure. No load , although it carries a 2.25% ER. Wasatch has done well in the past with WAEMX so I am hoping for the same in the frontier space. It is the only option available that I know of for the mutual fund space that has no load. If anyone else knows of no load options for frontier funds in the mutual fund space please let me know.

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Re: Do you overweight emerging markets?

Post by pingo » Thu Oct 11, 2012 6:37 pm

Thank you ClosetIndexer and Larry for your replies. I suspected that's what might be meant by core-type funds, but I am not well-versed in DFA nuance, so I figured I had better ask. :D
ClosetIndexer wrote:I guess Larry is saying that ideally you would have access to broad tilted 'core' funds, like those offered by DFA. These cover both developed and emerging markets, while offering small and value tilts.

And forget about rebalancing and tax costs; any small or value tilted EM funds I've seen have had absolutely horrific tracking errors too.
larryswedroe wrote:Pingo
Yes Vanguard total international is a core fund that combines two asset classes, EM and developed. That has major benefits, especially for taxable accounts
First, the funds rebalance for you, saving possible transactions costs and taxes.
Second, you avoid the large transactions costs and taxes that would occur if a stock shifted from EM to developed.
That is what I meant by a core fund.
But I also think if going to take EM risk might as well go to EMS and EMV as the correlations are almost 100%, so might as well seek the premium and earn higher expected returns or use that to lower beta exposure.
Especially true since most have low EM exposure in first place. Take typical 60% equity allocation. Say it's even 40% international, and that 1/4 is EM (which would be market cap weighting roughly) that's 10% of portfolio.
I own only EMV
Hope that clarifies
Larry
Maybe it's the wording, but I don't quite understand ClosetIndexer's "forget about rebalancing and tax costs [and] horrific tracking errors" and Larry's mention of "large transaction costs and taxes that would occur if a stock shifted from EM".

1. Is the conclusion that small or value tilted EM funds are not worth it (even in a tax-advantaged) unless one has has access to a DFA-ish fund?

2. Larry, by "if going to take EM risk might as well go to EMS and EMV" do you still mean only within the context of the emerging market exposure through a core/other DFA fund? You then say that you only own EMV, which comes off to my tired mind as a sudden reversal, but I've read enough of your posts to know that it is more likely and that I'm not grasping the continuity.

3. Are the above comments enough to cause problems for a non-valuey large cap Emerging Markets ETF, such as Schwab's (SCHE)?

4. Does anyone consider Schwab's RAFI-based Emerging Market option to be a viable alternative? Schwab Fundamental EM (SFENX) has ER 0.61% and 56% turnover; Fundamental International Sm-Md has ER 0.55% and 63% turnover. At the moment, my gut prefers Schwab's ETFs, which is a weird feeling because my gut response is usually to eschew ETFs. I'm not looking for RAFI magic, but I'll need options that I can regularly purchase and/or rebalance and it seems that VG ETFs may not be worth it at $9 a trade given my portfolio size. I've read much commentary against believing RAFI's are a better mouse trap. Other than conclusions that one can achieve similar results through tilting cap-weighted indices, I don't see anything that they're inherently bad so long as they aren't too costly. What constitutes "too costly" is something I'm a little shakey on.

I'm not asking for portfolio advice, rather I'm trying to understand some specifics within the context of comments in this thread.

If the right answer is "read more of the recommended books", I accept the underlying criticism and intend to do exactly that! :D
Last edited by pingo on Fri Oct 12, 2012 8:56 am, edited 2 times in total.

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Re: Do you overweight emerging markets?

Post by gkaplan » Thu Oct 11, 2012 6:49 pm

Gordon wrote:Fifty of my equity allocation is international. One-third of my international is emerging markets.
Actually, when you take into account the emerging markets allocation I have in my FTSE All-World ex-Us Small-Cap Index fund, my overall emerging markets allocation is greater than what I originally indicated.
Gordon

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Re: Do you overweight emerging markets?

Post by grap0013 » Thu Oct 11, 2012 7:16 pm

pingo wrote: Does anyone consider Schwab's RAFI-based Emerging Market option to be a viable alternative? Schwab Fundamental EM (SFENX) has ER 0.61% and 56% turnover; Fundamental International Sm-Md has ER 0.35% and 35% turnover. At the moment, my gut prefers Schwab's ETFs, which is a weird feeling because my gut response is usually to eschew ETFs. I'm not looking for RAFI magic, but I'll need options that I can regularly purchase and/or rebalance and it seems that VG ETFs may not be worth it at $9 a trade given my portfolio size. I've read much commentary against believing RAFI's are a better mouse trap. Other than conclusions that one can achieve similar results through tilting cap-weighted indices, I don't see anything that they're inherently bad so long as they aren't too costly. What constitutes "too costly" is something I'm a little shakey on.
Fundamental International Sm-Md has ER 0.55%.

I'm not crazy about the tracking error of SFENX relative to it's index. Some time spans it has been over 2% for a couple of years! I still really like RAFI's methodology though. Have to be patient with it.

For some reason I don't trust Schwab and their fees. It kinda makes me feel like when banks entice you with good rates only to decrease them at a later time. I'd buy VWO thru Vanguard for free rather the SCHE. Tighter spreads too.

Finally my favorite non-DFA fund in this space is DGS. Dividend weighted. Not the best way to value tilt, but still pretty good and should do the trick. Not too expensive, small and value tilt, high trading volume, and it tracks its index pretty well.
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Re: Do you overweight emerging markets?

Post by pingo » Fri Oct 12, 2012 9:01 am

grap0013 wrote:
pingo wrote: Does anyone consider Schwab's RAFI-based Emerging Market option to be a viable alternative? Schwab Fundamental EM (SFENX) has ER 0.61% and 56% turnover; Fundamental International Sm-Md has ER 0.35% and 35% turnover. At the moment, my gut prefers Schwab's ETFs, which is a weird feeling because my gut response is usually to eschew ETFs. I'm not looking for RAFI magic, but I'll need options that I can regularly purchase and/or rebalance and it seems that VG ETFs may not be worth it at $9 a trade given my portfolio size. I've read much commentary against believing RAFI's are a better mouse trap. Other than conclusions that one can achieve similar results through tilting cap-weighted indices, I don't see anything that they're inherently bad so long as they aren't too costly. What constitutes "too costly" is something I'm a little shakey on.
Fundamental International Sm-Md has ER 0.55%.

I'm not crazy about the tracking error of SFENX relative to it's index. Some time spans it has been over 2% for a couple of years! I still really like RAFI's methodology though. Have to be patient with it.

For some reason I don't trust Schwab and their fees. It kinda makes me feel like when banks entice you with good rates only to decrease them at a later time. I'd buy VWO thru Vanguard for free rather the SCHE. Tighter spreads too.

Finally my favorite non-DFA fund in this space is DGS. Dividend weighted. Not the best way to value tilt, but still pretty good and should do the trick. Not too expensive, small and value tilt, high trading volume, and it tracks its index pretty well.
Thank you for the correction and for sharing your experience and perspective.

WhiskeyJ
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Re: Do you overweight emerging markets?

Post by WhiskeyJ » Sat Jun 15, 2013 2:47 pm

if you only held 2 international ETFs (VWO-emerging markets, and VXUS-international), and you held a 50/50 split, does that mean you're 62.5% EM and 37.5% developed, since vxus has 25% EM?

In other words if you wanted to overweight emerging markets to get to a 50/50 split, what would be the percentage of VWO vs. VXUS?

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nedsaid
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Re: Do you overweight emerging markets?

Post by nedsaid » Sat Jun 15, 2013 2:57 pm

I own Emerging Market funds, three of them I think. I believe in this asset class but have not consciously overweighted them. I also own International Small/Mid-Cap. A combination of these two should put the "tiger in your tank" for your international investments.

I do urge folks not to overdo these volatile asset classes. As folks are now discovering, you can get burned.

It is a matter of taste and investment philosophy. Overweighting Emerging Markets is not an irrational strategy. I own them. What I do know is that my Morningstar X-Ray shows that I am weighted a bit away from Europe and Japan from the market averages. So I think I am perhaps a bit overweighted in EM. Didn't do it on purpose, but I am there.
A fool and his money are good for business.

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grabiner
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Re: Do you overweight emerging markets?

Post by grabiner » Sat Jun 15, 2013 3:38 pm

WhiskeyJ wrote:if you only held 2 international ETFs (VWO-emerging markets, and VXUS-international), and you held a 50/50 split, does that mean you're 62.5% EM and 37.5% developed, since vxus has 25% EM?

In other words if you wanted to overweight emerging markets to get to a 50/50 split, what would be the percentage of VWO vs. VXUS?
Solve the problem in the other direction. VXUS is 75% developed, and you want 50% developed, so you want 50/75=2/3 to be in VXUS and 1/3 in VWO.

In a taxable account, I wouldn't normally use this pair, instead using VEA (Tax-Managed International) for developed, and splitting VEA and VWO 50/50. This should lead to a lower tax bill because VEA has 100% qualified dividends. It is missing small-caps, so if you want to add small-caps, you also need to add VSS (FTSE Small-Cap) to get your desired small-cap allocation (and possibly an emerging market small-cap ETF if you want 50/50 in international small as well, but Vanguard doesn't have one and the non-Vanguard EEMS and EWX are rather expensive.)
Wiki David Grabiner

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Frengo
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Re: Do you overweight emerging markets?

Post by Frengo » Sat Jun 15, 2013 6:21 pm

Bungo wrote:My international allocation is 50% emerging, 50% developed. I have no idea which of these will perform better over the next few decades, so anything other than 50/50 seems unwarranted.
Your allocation is unstable.
A small change in relative capitalization of the two markets will force you to make large changes to your portfolio to rebalance.
Whereas the CW allocation wouldn't need to be touched.

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Liquid
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Re: Do you overweight emerging markets?

Post by Liquid » Tue Jun 18, 2013 6:52 pm

This thread appears to be heavy with rationalization to chase performance. Common knowledge espoused by 'experts' everywhere is that US returns will not meet previous expectations, and one might look to EM for returns....

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Re: Do you overweight emerging markets?

Post by Occupier » Tue Jun 18, 2013 7:19 pm

Yes I am overweight in EM. I got into them and China in a fairly big way in the beginning of the last decade. I bailed on China near the top, but I hate paying capital gains taxes and did not bail on EM. So the last year or so does not make me happy. I will get to market weight eventually which is where you should be. There are still good reasons to hold EM as Larry pointed out. I might add low correlation and a lot of potential, but if I was going to take a flyer these days I would be more interested in FM, the frontier markets etf. But I will tell you, both funds have a characteristic I don't like. When an emerging market gets really good like South Korea, it gets booted up to developed. Also when a developed market goes bad, like Greece, it gets dumped into EM. The same thing happens to the Frontier. E.G. the Emirates, who have been really hot, just got upgraded to emerging.

Yes I know the wisdom is to have market weight and tilt a bit to small and value, but sometimes I can't resist. But I dont overweight by more than a couple of percent. Dave

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Boglenaut
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Re: Do you overweight emerging markets?

Post by Boglenaut » Tue Jun 18, 2013 7:22 pm

I don't weight EM, but have no problem if someone does, as long as that is part of their long term plan.

The cost of Vanguard's fund is so low now it is not a barrier.

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Re: Do you overweight emerging markets?

Post by Noobvestor » Tue Jun 18, 2013 8:44 pm

Liquid wrote:This thread appears to be heavy with rationalization to chase performance. Common knowledge espoused by 'experts' everywhere is that US returns will not meet previous expectations, and one might look to EM for returns....
All depends on what someone does when the chips are down. Personally, I have been happily buying more EM as it tanks relative to US - I didn't buy it to chase performance (though over the long term, it would be nice if the higher risk came with higher reward), I bought it to diversify my US exposure.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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