Emerging Market allocation for UK-based investor

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danielbird193
Posts: 36
Joined: Thu Mar 21, 2019 2:15 pm

Emerging Market allocation for UK-based investor

Post by danielbird193 »

I'm 33 years old with an asset allocation target of roughly 75% stocks and 25% bonds. Most of the equity portion is in low-cost MSCI World Index trackers (LCWL and HMWO), but I know this index doesn't include any emerging market stocks. I'd therefore like to tilt my portfolio so that 10%ish of the equity portfolio is invested in emerging markets.

I know I could sell the MSCI World Index trackers and instead pick an index which does include EM (such as the FTSE All-World). However I don't want to incur the trading costs of selling existing holdings and buying new ones, so would prefer to add a 10% tilt with new cash.

There are two fund options listed on the UK investing Wiki, both of which track the MSCI Emerging Markets index:

- HSBC MSCI Emerging Markets ETF (HMEF) (0.4% expense ratio)
- Fidelity Index Emerging Markets open-ended fund (0.2% expense ratio)

I have also uncovered the following from my own research:

- iShares Core MSCI Emerging Markets IMI ETF (0.18% expense ratio)
- Vanguard FTSE Emerging Markets ETF (0.25% expense ratio)

Plus a few others which follow min vol / dividend / ESG strategies, some of which also look appealing from a price / performance perspective.

A few questions for the more experienced Bogleheads, if I may:

1. If I choose to track the MSCI Emerging Markets index, is there any reason not to go for the cheaper iShares ETF rather than the HSBC one recommended on the Wiki? (My assumption is that the iShares one either wasn't available or was more expensive when the Wiki was written, which accounts for the HSBC one being listed. However if there's something I've missed it would be good to know).

2. Are there any meaningful differences between the MSCI and FTSE Emerging Markets indices which I should be aware of? I.e. is there any reason to go for the Vanguard ETF over the iShares one?

3. Are there any other considerations when tilting towards emerging markets which might lead me to look any closer at some of the min vol / dividend / ESG options?


Thanks in advance for you help!

Dan
Valuethinker
Posts: 41129
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Re: Emerging Market allocation for UK-based investor

Post by Valuethinker »

danielbird193 wrote: Thu Jul 18, 2019 3:39 am I'm 33 years old with an asset allocation target of roughly 75% stocks and 25% bonds. Most of the equity portion is in low-cost MSCI World Index trackers (LCWL and HMWO), but I know this index doesn't include any emerging market stocks. I'd therefore like to tilt my portfolio so that 10%ish of the equity portfolio is invested in emerging markets.

I know I could sell the MSCI World Index trackers and instead pick an index which does include EM (such as the FTSE All-World). However I don't want to incur the trading costs of selling existing holdings and buying new ones, so would prefer to add a 10% tilt with new cash.

There are two fund options listed on the UK investing Wiki, both of which track the MSCI Emerging Markets index:

- HSBC MSCI Emerging Markets ETF (HMEF) (0.4% expense ratio)
- Fidelity Index Emerging Markets open-ended fund (0.2% expense ratio)

I have also uncovered the following from my own research:

- iShares Core MSCI Emerging Markets IMI ETF (0.18% expense ratio)
- Vanguard FTSE Emerging Markets ETF (0.25% expense ratio)

Plus a few others which follow min vol / dividend / ESG strategies, some of which also look appealing from a price / performance perspective.

A few questions for the more experienced Bogleheads, if I may:

1. If I choose to track the MSCI Emerging Markets index, is there any reason not to go for the cheaper iShares ETF rather than the HSBC one recommended on the Wiki? (My assumption is that the iShares one either wasn't available or was more expensive when the Wiki was written, which accounts for the HSBC one being listed. However if there's something I've missed it would be good to know).
None that I know of - agree HSBC one was probably legacy.
2. Are there any meaningful differences between the MSCI and FTSE Emerging Markets indices which I should be aware of? I.e. is there any reason to go for the Vanguard ETF over the iShares one?
You can look at the ETF compositions and see the weightings. I don't know what the specific differences are. I don't think they will be material.
3. Are there any other considerations when tilting towards emerging markets which might lead me to look any closer at some of the min vol / dividend / ESG options?


Thanks in advance for you help!

Dan
The problem has been the size of China in the index, particularly Chinese internet stocks. Have not tracked that in the last few months - it definitely looked like a bubble to me (complex Chinese companies, unclear to what extent the stock price is false due to speculation and government restrictions). Perhaps now with the trade war the Chinese stock market may be a smaller proportion?

There is an ishares EM Value ETF EMVL but to some extent my platform (Barclays) does not have it - can't seem to trade it.

So I did take a position in an EM dividend fund, which heavily tilts away from China, has lots of Russia, low price to book horror stocks etc. However the ER is 0.6% which probably cancels out any benefit of the strategy ;-).
TedSwippet
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Location: UK

Re: Emerging Market allocation for UK-based investor

Post by TedSwippet »

Valuethinker wrote: Thu Jul 18, 2019 4:14 am
danielbird193 wrote: Thu Jul 18, 2019 3:39 am 1. If I choose to track the MSCI Emerging Markets index, is there any reason not to go for the cheaper iShares ETF rather than the HSBC one recommended on the Wiki? (My assumption is that the iShares one either wasn't available or was more expensive when the Wiki was written, which accounts for the HSBC one being listed. However if there's something I've missed it would be good to know).
None that I know of - agree HSBC one was probably legacy.
Yes, that. It's a bit of a Sisyphean task trying to keep the UK investing wiki page up to date with the constantly shifting landscape of ETFs, funds, and charges available to UK investors. In a way this is a good thing -- choices generates competition and keeps prices down -- but it's a bit of a bear when it comes to trying to keep this page current.

Not sure of the best way to tackle this. Maybe a link somewhere to Morningstar's fund/ETF screener, or JustETF, or similar? That would solve the problem of having to update the page constantly, but these screeners can be intimidating in their complexity, and don't always produce great results unless you already have a good idea of what it is that you're looking for in the first place.
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Schlabba
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Re: Emerging Market allocation for UK-based investor

Post by Schlabba »

To question 2: a difference between ftse and msci is south korea. For ftse its included in the developed markets and not included in the emerging markets. For msci it is the other way around.
If you mix ftse and msci you might end up with a double south korea or no south korea.
Secretly a dividend investor. Feel free to ask why.
Topic Author
danielbird193
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Re: Emerging Market allocation for UK-based investor

Post by danielbird193 »

Thanks for all of the replies. Helpful to know that South Korea is the only real difference between the MSCI and FTSE indices. Seems to make sense that as my developed world exposure tracks an MSCI index, I should stick with an MSCI index for EM, otherwise I am missing out on Samsung, Hyundai and... all those other big South Korean companies :?
Valuethinker wrote: Thu Jul 18, 2019 4:14 am The problem has been the size of China in the index, particularly Chinese internet stocks. Have not tracked that in the last few months - it definitely looked like a bubble to me (complex Chinese companies, unclear to what extent the stock price is false due to speculation and government restrictions). Perhaps now with the trade war the Chinese stock market may be a smaller proportion?

There is an ishares EM Value ETF EMVL but to some extent my platform (Barclays) does not have it - can't seem to trade it.

So I did take a position in an EM dividend fund, which heavily tilts away from China, has lots of Russia, low price to book horror stocks etc. However the ER is 0.6% which probably cancels out any benefit of the strategy ;-).
This was part of the reason for looking at the min vol / dividend / ESG type ETFs. The mainstream indices are very heavy on Tencent / Alibaba and I already have an overweight to those from a position in Scottish Mortgage Investment Trust (I know Bogleheads don't believe in active management, but SMT has done SO well for me over the years that I couldn't bring myself to sell the whole lot, plus the expense ratio is pretty low).

So actually you've confirmed my thinking... Tencent / Alibaba make up close to 10% of the MSCI EM index, which would mean lots of overlap if I choose a mainstream ETF. An EM dividend ETF would diversify me into financials, basic materials and energy which are under-represented elsewhere in my portfolio.

I'll try to find an accumulating one as dividends aren't important to me, although reinvesting them certainly is!
Topic Author
danielbird193
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Re: Emerging Market allocation for UK-based investor

Post by danielbird193 »

TedSwippet wrote: Thu Jul 18, 2019 4:32 am It's a bit of a Sisyphean task trying to keep the UK investing wiki page up to date with the constantly shifting landscape of ETFs, funds, and charges available to UK investors. In a way this is a good thing -- choices generates competition and keeps prices down -- but it's a bit of a bear when it comes to trying to keep this page current.

Not sure of the best way to tackle this. Maybe a link somewhere to Morningstar's fund/ETF screener, or JustETF, or similar? That would solve the problem of having to update the page constantly, but these screeners can be intimidating in their complexity, and don't always produce great results unless you already have a good idea of what it is that you're looking for in the first place.
Agree that it would be an impossible task to constantly update the page as newer, cheaper funds are launched.

Maybe just a line or two at the top of the page explaining that these funds were chosen as at a particular date, and that before choosing it might be worth checking Morningstar / JustETF (the latter being my preferred one as filtering is simpler) to check if the market has changed.
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Hyperborea
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Re: Emerging Market allocation for UK-based investor

Post by Hyperborea »

Valuethinker wrote: Thu Jul 18, 2019 4:14 am The problem has been the size of China in the index, particularly Chinese internet stocks. Have not tracked that in the last few months - it definitely looked like a bubble to me (complex Chinese companies, unclear to what extent the stock price is false due to speculation and government restrictions). Perhaps now with the trade war the Chinese stock market may be a smaller proportion?

There is an ishares EM Value ETF EMVL but to some extent my platform (Barclays) does not have it - can't seem to trade it.
That's still got 35% in China so if China is an issue that may not the right fund choice.

EMVL - https://www.ishares.com/uk/individual/e ... d-acc-fund
It’s hard to win an argument with a smart person, it's damn near impossible to win an argument with a stupid person. - Bill Murray
Valuethinker
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Re: Emerging Market allocation for UK-based investor

Post by Valuethinker »

Hyperborea wrote: Mon Jul 22, 2019 5:12 am
Valuethinker wrote: Thu Jul 18, 2019 4:14 am The problem has been the size of China in the index, particularly Chinese internet stocks. Have not tracked that in the last few months - it definitely looked like a bubble to me (complex Chinese companies, unclear to what extent the stock price is false due to speculation and government restrictions). Perhaps now with the trade war the Chinese stock market may be a smaller proportion?

There is an ishares EM Value ETF EMVL but to some extent my platform (Barclays) does not have it - can't seem to trade it.
That's still got 35% in China so if China is an issue that may not the right fund choice.

EMVL - https://www.ishares.com/uk/individual/e ... d-acc-fund
Yes but if you look at the composition heavily tilted away from the internet companies?
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Hyperborea
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Re: Emerging Market allocation for UK-based investor

Post by Hyperborea »

Valuethinker wrote: Mon Jul 22, 2019 6:05 am
Hyperborea wrote: Mon Jul 22, 2019 5:12 am
Valuethinker wrote: Thu Jul 18, 2019 4:14 am The problem has been the size of China in the index, particularly Chinese internet stocks. Have not tracked that in the last few months - it definitely looked like a bubble to me (complex Chinese companies, unclear to what extent the stock price is false due to speculation and government restrictions). Perhaps now with the trade war the Chinese stock market may be a smaller proportion?

There is an ishares EM Value ETF EMVL but to some extent my platform (Barclays) does not have it - can't seem to trade it.
That's still got 35% in China so if China is an issue that may not the right fund choice.

EMVL - https://www.ishares.com/uk/individual/e ... d-acc-fund
Yes but if you look at the composition heavily tilted away from the internet companies?
It doesn't really appear that way. Let's compare it against EIMI - iShares Core MSCI EM.

EMVL holds 35% in China, larger than the ~29% that EIMI holds. They both seem to have 5 Chinese companies in the top 10 with an overlap of 4 of them. EMVL holds ~5.25% of Alibaba and Ten Cent combined while EIMI holds ~8%. There doesn't seem to be that much difference in them from a Chinese internet company or even just a China stance. A difference of 3% of the top Chinese internet companies on perhaps a 10% or 20% share of total portfolio isn't going to make that big a difference.
It’s hard to win an argument with a smart person, it's damn near impossible to win an argument with a stupid person. - Bill Murray
Valuethinker
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Re: Emerging Market allocation for UK-based investor

Post by Valuethinker »

Hyperborea wrote: Mon Jul 22, 2019 7:47 am
Valuethinker wrote: Mon Jul 22, 2019 6:05 am
Hyperborea wrote: Mon Jul 22, 2019 5:12 am
Valuethinker wrote: Thu Jul 18, 2019 4:14 am The problem has been the size of China in the index, particularly Chinese internet stocks. Have not tracked that in the last few months - it definitely looked like a bubble to me (complex Chinese companies, unclear to what extent the stock price is false due to speculation and government restrictions). Perhaps now with the trade war the Chinese stock market may be a smaller proportion?

There is an ishares EM Value ETF EMVL but to some extent my platform (Barclays) does not have it - can't seem to trade it.
That's still got 35% in China so if China is an issue that may not the right fund choice.

EMVL - https://www.ishares.com/uk/individual/e ... d-acc-fund
Yes but if you look at the composition heavily tilted away from the internet companies?
It doesn't really appear that way. Let's compare it against EIMI - iShares Core MSCI EM.

EMVL holds 35% in China, larger than the ~29% that EIMI holds. They both seem to have 5 Chinese companies in the top 10 with an overlap of 4 of them. EMVL holds ~5.25% of Alibaba and Ten Cent combined while EIMI holds ~8%. There doesn't seem to be that much difference in them from a Chinese internet company or even just a China stance. A difference of 3% of the top Chinese internet companies on perhaps a 10% or 20% share of total portfolio isn't going to make that big a difference.
Interesting. Thank you.

My platform does not seem to allow me to buy EMVL - at least I cannot find it.

Instead I use an EM dividend ETF. I feel bad about that because the ER is 0.6% (that's just the management fee, I believe). On the other hand it tilts heavily away from China, and has lots of financial services companies, Russian natural resource companies etc. The good stuff ;-).

I was reassured that I had heard of at most 1 of the top 10 holdings ;-).

SEDY https://www.ishares.com/uk/individual/e ... -ucits-etf

Countries

Taiwan
20.01
Russian Federation
16.60
China
10.55
Brazil
9.75
South Africa
8.48
Thailand
7.84
Turkey
3.98
India
3.87
Malaysia
3.30
United Arab Emirates
3.28

Sectors

Materials
15.55
Financials
14.78
Information Technology
14.19
Communication
12.98
Real Estate
12.20
Utilities
9.08
Energy
8.07
Consumer Discretionary
5.50
Industrials
3.54
Consumer Staples
2.36


5.86 Fiscal Year End 30/Nov/2016 P/E Ratio
as of 19/Jul/2019

8.36

P/B Ratio

as of 19/Jul/2019
1.21

3y Beta Beta is a measure of the tendency of securities to move with the market as a whole. A beta of 1 indicates that the security&#39;s price will move with the market. A beta less than 1 indicates the security tends to be less volatile than the market, while a beta greater than 1 indicates the security is more volatile than the market.<br/><br/>Calculated vs. Benchmark Index


1.001

Standard Deviation (3y) Standard deviation measures how dispersed returns are around the average. A higher standard deviation indicates that returns are spread out over a larger range of values and thus, more volatile.
as of 30/Jun/2019

12.47%

CHMF SEVERSTAL Materials USD 10,605,208.05 2.30
MAGN RU0009084396 MAGNITOGORSKIY METALLURGICHESKIY K Materials USD 9,043,855.24 1.96
JAS.R TH0418010R12 JASMINE INTERNATIONAL NON-VOTING D Communication USD 8,826,846.43 1.91
ARL ZAE000029757 ASTRAL FOODS LTD Consumer Staples USD 8,301,662.35 1.80
TRPL4 BRTRPLACNPR1 CTEEP COMPANHIA DE TRANSMISSAO DE Utilities USD 8,052,451.94 1.74
2408 TW0002408002 NANYA TECHNOLOGY CORP Information Technology USD 8,047,969.59 1.74
VTBR RU000A0JP5V6 BANK VTB Financials USD 7,922,784.65 1.72
EREGL TRAEREGL91G3 EREGLI DEMIR VE CELIK FABRIKALARI Materials USD 7,824,934.06 1.69
ITMG ID1000108509 INDO TAMBANGRAYA MEGAH Energy USD 7,596,582.35 1.65
3383 KYG011981035 AGILE GROUP HOLDINGS LTD Real Estate USD 7,474,206.65 1.62
Topic Author
danielbird193
Posts: 36
Joined: Thu Mar 21, 2019 2:15 pm

Re: Emerging Market allocation for UK-based investor

Post by danielbird193 »

I found the WisdomTree Emerging Markets Equity Income ETF (ticker DEM or DEMD). It seems to have a similar tilt to the iShares fund you mention (18% in Russia, high percentage in energy and materials, nothing in Alibaba, Tencent or Baidu). However the expense ratio is 0.46% which seems competitive for an emerging markets fund.

Factsheet is here: https://www.wisdomtree.eu/en-gb/-/media ... -demd).pdf
sharkbite
Posts: 1
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Re: Emerging Market allocation for UK-based investor

Post by sharkbite »

Given the post-Brexit economic outlook, a UK allocation may shortly be an emerging market allocation.
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