Does Emerging Markets make sense?

For investors outside the US. Personal investments, personal finance, investing news and theory.
Sister forums: Canada, Spain (en español)
---------------
Topic Author
empe
Posts: 3
Joined: Fri Jun 12, 2015 11:36 am

Does Emerging Markets make sense?

Post by empe » Fri Jan 31, 2020 3:40 pm

I've been investing in ETFs that track MSCI World and MSCI Emerging Markets, but for some time I've been thinking if Emerging Markets really makes sense at all on the conceptual level.

MSCI World index includes 23 developed markets while MSCI Emerging Markets index includes 26 emerging markets. If I've understood correctly, MSCI decides which market is considered as developed and which as emerging. In some occasions, a market can change index, and not always for the better.

If we think that MSCI World is the top 23 markets in the world and MSCI Emerging Markets includes the 26 markets that follow, what's the point in investing in Emerging Markets? When a market improves, it will reach the point when it's taken from EM index to World, essentially making World index the premium collection and EM the "farm league".

So is investing in Emerging Markets basically by definition investing in the losing markets as the better ones will eventually leave the index?

Schlabba
Posts: 341
Joined: Sat May 11, 2019 9:14 am

Re: Does Emerging Markets make sense?

Post by Schlabba » Fri Jan 31, 2020 4:20 pm

They make sense. But I want to be very clear that you don't need them. You can choose to add them if you choose. They are supposed to be increased risk and reward, simply look at the dives they take when a financial crisis hits.

I wouldn't call them losing markets. China's population has increased their wealth faster than at any time in history. They came from 88% living below the poverty line to where they are today.

Some people have a fear of missing out. What if China will be at or surpassed the western world in 2075? I, assuming I live to a ripe old age, will be invested until 2090! But on the other hand you should also realise that whatever you choose to do today, in hindsight there will have been a better choice.


Holding the MSCI World will give you good returns over the long term. Jack Bogle himself advised US citizens to only hold the S&P500 (ie. 100% developed markets).

retiredjg
Posts: 39368
Joined: Thu Jan 10, 2008 12:56 pm

Re: Does Emerging Markets make sense?

Post by retiredjg » Fri Jan 31, 2020 5:07 pm

There will be a year or more likely some years when an emerging market fund will take off and run. If you want to participate in that fully, you must be holding those stocks before it happens.

Buying after an asset class has gone up is either less effective or not effective at all...depending on when you buy in. As always, it's a crap shoot.

Whether you hold emerging markets or not is entirely up to you. If you choose to hold it, you need to hold it through thick and thin. If you choose to bypass it, you need to bypass it even when it is doing well.

If you save enough and diversify, holding a little EM or not is not going to make much difference in your long term overall portfolio. Just make a decision and stick with it.

You should first consider sticking with the decision you made awhile back. :happy If you don't, make the switch now and never go back.

BionicBillWalsh
Posts: 172
Joined: Sun Oct 21, 2018 1:56 am
Location: Sandwich Islands

Re: Does Emerging Markets make sense?

Post by BionicBillWalsh » Fri Jan 31, 2020 5:10 pm

VTIAX (Vanguard Total International Stock Index Fund Admiral Shares) and chill. 22.9% EM within that fund.
Saltwater has an amazing ability to wash away many of life’s troubles

MotoTrojan
Posts: 8196
Joined: Wed Feb 01, 2017 8:39 pm

Re: Does Emerging Markets make sense?

Post by MotoTrojan » Fri Jan 31, 2020 5:22 pm

I am not sure why you assume developed means top and emerging means weak. It has to do with the growth cycle of their economies, but an emerging economy can be much stronger than a developed and vis versa.

Small-cap stocks eventually become large-cap stocks and join those indices, but some still like to hold them for that initial growth :).

FWIW I don't hold much EM, but mainly because I like to tilt my ex-US to small-value and the funds in that arena are developed only. I don't lose sleep without EM.

Trader Joe
Posts: 1529
Joined: Fri Apr 25, 2014 6:38 pm

Re: Does Emerging Markets make sense?

Post by Trader Joe » Fri Jan 31, 2020 5:29 pm

empe wrote:
Fri Jan 31, 2020 3:40 pm
I've been investing in ETFs that track MSCI World and MSCI Emerging Markets, but for some time I've been thinking if Emerging Markets really makes sense at all on the conceptual level.

MSCI World index includes 23 developed markets while MSCI Emerging Markets index includes 26 emerging markets. If I've understood correctly, MSCI decides which market is considered as developed and which as emerging. In some occasions, a market can change index, and not always for the better.

If we think that MSCI World is the top 23 markets in the world and MSCI Emerging Markets includes the 26 markets that follow, what's the point in investing in Emerging Markets? When a market improves, it will reach the point when it's taken from EM index to World, essentially making World index the premium collection and EM the "farm league".

So is investing in Emerging Markets basically by definition investing in the losing markets as the better ones will eventually leave the index?
Welcome to the forum. No, it never makes sense to invest in Emerging Markets.

User avatar
andromeda2k12
Posts: 41
Joined: Sun Oct 13, 2019 10:22 pm

Re: Does Emerging Markets make sense?

Post by andromeda2k12 » Fri Jan 31, 2020 5:35 pm

Trader Joe wrote:
Fri Jan 31, 2020 5:29 pm
empe wrote:
Fri Jan 31, 2020 3:40 pm
I've been investing in ETFs that track MSCI World and MSCI Emerging Markets, but for some time I've been thinking if Emerging Markets really makes sense at all on the conceptual level.

MSCI World index includes 23 developed markets while MSCI Emerging Markets index includes 26 emerging markets. If I've understood correctly, MSCI decides which market is considered as developed and which as emerging. In some occasions, a market can change index, and not always for the better.

If we think that MSCI World is the top 23 markets in the world and MSCI Emerging Markets includes the 26 markets that follow, what's the point in investing in Emerging Markets? When a market improves, it will reach the point when it's taken from EM index to World, essentially making World index the premium collection and EM the "farm league".

So is investing in Emerging Markets basically by definition investing in the losing markets as the better ones will eventually leave the index?
Welcome to the forum. No, it never makes sense to invest in Emerging Markets.
Never? That seems like a huge blanket statement considering vanguard itself generally advises market cap weight for EM

jrbdmb
Posts: 427
Joined: Tue Oct 06, 2015 4:27 pm

Re: Does Emerging Markets make sense?

Post by jrbdmb » Fri Jan 31, 2020 5:38 pm

How about "not this week." :annoyed

andrew99999
Posts: 594
Joined: Fri Jul 13, 2018 8:14 pm

Re: Does Emerging Markets make sense?

Post by andrew99999 » Sat Feb 01, 2020 3:25 am

empe wrote:
Fri Jan 31, 2020 3:40 pm
If we think that MSCI World is the top 23 markets in the world and MSCI Emerging Markets includes the 26 markets that follow, what's the point in investing in Emerging Markets? When a market improves, it will reach the point when it's taken from EM index to World, essentially making World index the premium collection and EM the "farm league".

So is investing in Emerging Markets basically by definition investing in the losing markets as the better ones will eventually leave the index?
Change EM to SC/MC/Value and you are a making the same incorrect argument that somehow because they are priced lower and are not yet large cap that they are a losing part of the market. Not only are you incorrect but you have it backwards.

User avatar
watchnerd
Posts: 3283
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Does Emerging Markets make sense?

Post by watchnerd » Sat Feb 01, 2020 5:18 am

empe wrote:
Fri Jan 31, 2020 3:40 pm
I've been investing in ETFs that track MSCI World and MSCI Emerging Markets, but for some time I've been thinking if Emerging Markets really makes sense at all on the conceptual level.

MSCI World index includes 23 developed markets while MSCI Emerging Markets index includes 26 emerging markets. If I've understood correctly, MSCI decides which market is considered as developed and which as emerging. In some occasions, a market can change index, and not always for the better.

If we think that MSCI World is the top 23 markets in the world and MSCI Emerging Markets includes the 26 markets that follow, what's the point in investing in Emerging Markets? When a market improves, it will reach the point when it's taken from EM index to World, essentially making World index the premium collection and EM the "farm league".

So is investing in Emerging Markets basically by definition investing in the losing markets as the better ones will eventually leave the index?
Higher risk, higher expected return.

JP Morgan, Blackrock, and Vanguard all forecast better returns over the next decade for EM than for DM.

Personally, I don't try to pick winners -- I just hold market weight of everything, including EM.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

AlohaJoe
Posts: 5141
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Does Emerging Markets make sense?

Post by AlohaJoe » Sat Feb 01, 2020 5:46 am

Elysium wrote:
Fri Jan 31, 2020 3:51 pm
Quick question for you. How many EM countries have actually left the index in the past 25 years? past 50?
the answer is 1
Going by MSCI:
Morocco left in 2013.
Israel left in 2010.
Argentina left in 2009.
Jordan left in 2008.
Greece left in 2001.
Portugal left in 1997.

South Korea seems likely to leave the index sometime soon (FTSE made it a developed market in 2009, MSCI has yet to do). Peru may also leave the index soon, according to MSCI's June press release.

Topic Author
empe
Posts: 3
Joined: Fri Jun 12, 2015 11:36 am

Re: Does Emerging Markets make sense?

Post by empe » Sat Feb 01, 2020 8:10 am

Thanks for the feedback. I was especially interested in your views regarding the concept of index investing in emerging markets.

I've been lurking on many forums and over the course of years I don't recall ever seeing a discussion about the underlying principle of better performing markets leaving the EM index and basically lacklusters remaining there.

I know that MSCI EM index isn't needed for diversification. Some say that MSCI World isn't needed either, that S&P 500 or some other more finite index is enough.

The reason I initially started to invest in EM index was that I wanted to have as neutral and as simple strategy as possible. Something like MSCI ACWI but with World+EM as ACWI wasn't available as low cost ETF in my region. Going with just MSCI World would have meant that I expect emerging markets to shrink rather than grow.

Over time, I have become more skeptical regarding this approach as I've gained knowledge on how emerging markets work, like that government interference in China for example. Is it arrogant to expect them go become like developed markets? One position I've often come across is that investing in emerging markets is feasible only through an active fund with on-site fund manager.

Another question I find myself often asking is, would I ever buy stocks of a company located in emerging markets, or fund that tracks the index of a single emerging market country? And if the answer for those is "no", how come it's so different to invest in the full EM index?

This is a debate I've had with myself for years and probably continue to do so. I don't make changes to my investment plan lightly. My plan has actually remained the same since 2015 so I regard myself a very stagnant investor.

glorat
Posts: 399
Joined: Thu Apr 18, 2019 2:17 am

Re: Does Emerging Markets make sense?

Post by glorat » Sat Feb 01, 2020 8:20 am

empe wrote:
Sat Feb 01, 2020 8:10 am
I don't recall ever seeing a discussion about the underlying principle of better performing markets leaving the EM index and basically lacklusters remaining there.
It seems you believe that better performing markets get upgraded from EM to developed and that lower performing lacklusters stay in EM.

Where does this belief come from?

alex_686
Posts: 5297
Joined: Mon Feb 09, 2015 2:39 pm

Re: Does Emerging Markets make sense?

Post by alex_686 » Sat Feb 01, 2020 8:33 am

I will point out that your logic was strong 20 years ago and it is fading. EM indexes are looking a lot like their DM counterparts. They are becoming more and more dominated by large multinational companies. I will point out that

First, take a look at where their revenues and earnings are coming from. These companies regressing more and more along world and sector factors. Where their headquarters is located is firmly in 3rd place and falling.

Second, look who their owners are. Once again, multinational. EM is defined as the floor. Most large EM companies are choosing higher standards. Most have issued ADRs, which puts them under SEC purview.

Would you every consider buying shares in Apple? Samsung? Google? I will point out that EM markets are stuffed full of tech companies who are their suppliers. These companies act like tech companies, not like the EM countries that they are located. If you invest in one, why not the other?

alex_686
Posts: 5297
Joined: Mon Feb 09, 2015 2:39 pm

Re: Does Emerging Markets make sense?

Post by alex_686 » Sat Feb 01, 2020 8:37 am

glorat wrote:
Sat Feb 01, 2020 8:20 am
empe wrote:
Sat Feb 01, 2020 8:10 am
I don't recall ever seeing a discussion about the underlying principle of better performing markets leaving the EM index and basically lacklusters remaining there.
It seems you believe that better performing markets get upgraded from EM to developed and that lower performing lacklusters stay in EM.

Where does this belief come from?
This is true. Remember, the primary difference between DM and EM markets is the quality of the markets. Accounting standards raised to international levels, depth of markets, quality of custodians, etc. Historically, when a market has moved from EM to DM there has been a drop in the risk premium and a flood on international money flowing in. There is a one time bump up in prices and a drop in volatility.

Explorer
Posts: 333
Joined: Thu Oct 13, 2016 7:54 pm

Re: Does Emerging Markets make sense?

Post by Explorer » Sat Feb 01, 2020 9:13 am

Own the haystack in the right proportions.. I invest in VTIAX/VXUS which includes about 20% EM - no one knows which market will do better over time in the future.

EM is where the population & population growth is - and productive workforce with an average/median age much lower than that of the developed markets. As others said, you need to worry about quality of financial disclosures and transparency.

I also think the trade war with China will have long lasting impact on how much developed market companies will depend on China - many are shifting out of China to other cost-effective countries in the south-east asia. The beauty of the index is it will adjust as countries go in/out of favor.

Currently, developed markets are relatively over-valued. Too many choices.. darn.

Diversification ensures you get market returns. If you think you can bet better, more selectively, that is fine too..

My 2 cents: I don't overthink, I just own the haystack.

Schlabba
Posts: 341
Joined: Sat May 11, 2019 9:14 am

Re: Does Emerging Markets make sense?

Post by Schlabba » Sat Feb 01, 2020 9:31 am

Explorer wrote:
Sat Feb 01, 2020 9:13 am
Own the haystack in the right proportions.. I invest in VTIAX/VXUS which includes about 20% EM - no one knows which market will do better over time in the future.

EM is where the population & population growth is - and productive workforce with an average/median age much lower than that of the developed markets. As others said, you need to worry about quality of financial disclosures and transparency.

I also think the trade war with China will have long lasting impact on how much developed market companies will depend on China - many are shifting out of China to other cost-effective countries in the south-east asia. The beauty of the index is it will adjust as countries go in/out of favor.

Currently, developed markets are relatively over-valued. Too many choices.. darn.

Diversification ensures you get market returns. If you think you can bet better, more selectively, that is fine too..

My 2 cents: I don't overthink, I just own the haystack.
I agree with your conclusion of holding roughly market weight, but I disagree with the reasoning.

All of your thoughts and concerns should be more or less priced in. I am more of a "no one knows anything" kind of person and therefore you should accept whatever the market is doing.

glorat
Posts: 399
Joined: Thu Apr 18, 2019 2:17 am

Re: Does Emerging Markets make sense?

Post by glorat » Sat Feb 01, 2020 10:21 am

alex_686 wrote:
Sat Feb 01, 2020 8:37 am
Remember, the primary difference between DM and EM markets is the quality of the markets. Accounting standards raised to international levels, depth of markets, quality of custodians, etc. Historically, when a market has moved from EM to DM there has been a drop in the risk premium and a flood on international money flowing in. There is a one time bump up in prices and a drop in volatility.
I agree with your assessment of the primary difference and I have no reason to doubt your historic point that a reallocation from EM to DM brings in money and value. It makes perfect sense
alex_686 wrote:
Sat Feb 01, 2020 8:37 am
glorat wrote:
Sat Feb 01, 2020 8:20 am
empe wrote:
Sat Feb 01, 2020 8:10 am
I don't recall ever seeing a discussion about the underlying principle of better performing markets leaving the EM index and basically lacklusters remaining there.
It seems you believe that better performing markets get upgraded from EM to developed and that lower performing lacklusters stay in EM.
This is true.
But how does this translate to developed world being a "better performing" market than emerging markets? I'm assuming performing means rate of return of investment. Or is your point that higher quality markets should generated better returns than lower quality markets?

alex_686
Posts: 5297
Joined: Mon Feb 09, 2015 2:39 pm

Re: Does Emerging Markets make sense?

Post by alex_686 » Sat Feb 01, 2020 10:44 am

glorat wrote:
Sat Feb 01, 2020 10:21 am
But how does this translate to developed world being a "better performing" market than emerging markets? I'm assuming performing means rate of return of investment. Or is your point that higher quality markets should generated better returns than lower quality markets?
Return is one factor. Volatility is another. How much insiders are skimming off is another. I mean a nice boring water utility can be a excellent boring and only have modest returns.

What I am trying to get to - primarily- is corporate governance. Quality annual reports, minority shareholder rights etc. There are secondary issues like insider trading and quality stock exchanges. But anyway, individual markets set a floor on corporate governances. Minimum requirements.

However many of the larger EM companies have adopted higher DM corporate governance and activity court international investors and their stock analysts. The result is that these companies trade at the same price metrics (such as P/E ratios) as their DM counterparts. No EM risk penalty here.

20 years ago the DM/EM designation was a clear signal of the company’s corporate governance. Today, not so much.

If I recall correctly, stocks used to jump up between 7% to 12% when they moved from EM to DM. Loss os risk stigma and international money moving into a safe mark pushes price up. Less true today because so many of the companies have already been recognized as adhering to a higher quality.

marcwd
Posts: 223
Joined: Tue Feb 20, 2007 10:15 am
Location: Massachusetts

Re: Does Emerging Markets make sense?

Post by marcwd » Sat Feb 01, 2020 1:33 pm

Trader Joe wrote:
Fri Jan 31, 2020 5:29 pm
empe wrote:
Fri Jan 31, 2020 3:40 pm
I've been investing in ETFs that track MSCI World and MSCI Emerging Markets, but for some time I've been thinking if Emerging Markets really makes sense at all on the conceptual level.

MSCI World index includes 23 developed markets while MSCI Emerging Markets index includes 26 emerging markets. If I've understood correctly, MSCI decides which market is considered as developed and which as emerging. In some occasions, a market can change index, and not always for the better.

If we think that MSCI World is the top 23 markets in the world and MSCI Emerging Markets includes the 26 markets that follow, what's the point in investing in Emerging Markets? When a market improves, it will reach the point when it's taken from EM index to World, essentially making World index the premium collection and EM the "farm league".

So is investing in Emerging Markets basically by definition investing in the losing markets as the better ones will eventually leave the index?
Welcome to the forum. No, it never makes sense to invest in Emerging Markets.
Trader Joe wrote: Fri Jul 04, 2014 7:00 pm
I like and hold the Vanguard Emerging Market fund.

:oops:

Schlabba
Posts: 341
Joined: Sat May 11, 2019 9:14 am

Re: Does Emerging Markets make sense?

Post by Schlabba » Sat Feb 01, 2020 1:47 pm

marcwd wrote:
Sat Feb 01, 2020 1:33 pm
Trader Joe wrote:
Fri Jan 31, 2020 5:29 pm
empe wrote:
Fri Jan 31, 2020 3:40 pm
I've been investing in ETFs that track MSCI World and MSCI Emerging Markets, but for some time I've been thinking if Emerging Markets really makes sense at all on the conceptual level.

MSCI World index includes 23 developed markets while MSCI Emerging Markets index includes 26 emerging markets. If I've understood correctly, MSCI decides which market is considered as developed and which as emerging. In some occasions, a market can change index, and not always for the better.

If we think that MSCI World is the top 23 markets in the world and MSCI Emerging Markets includes the 26 markets that follow, what's the point in investing in Emerging Markets? When a market improves, it will reach the point when it's taken from EM index to World, essentially making World index the premium collection and EM the "farm league".

So is investing in Emerging Markets basically by definition investing in the losing markets as the better ones will eventually leave the index?
Welcome to the forum. No, it never makes sense to invest in Emerging Markets.
Trader Joe wrote: Fri Jul 04, 2014 7:00 pm
I like and hold the Vanguard Emerging Market fund.

:oops:
Fri Jul 04, 2014? The man is allowed to change his mind over a 6 year time span.

marcwd
Posts: 223
Joined: Tue Feb 20, 2007 10:15 am
Location: Massachusetts

Re: Does Emerging Markets make sense?

Post by marcwd » Sat Feb 01, 2020 1:57 pm

Schlabba wrote:
Sat Feb 01, 2020 1:47 pm
marcwd wrote:
Sat Feb 01, 2020 1:33 pm
Trader Joe wrote:
Fri Jan 31, 2020 5:29 pm
empe wrote:
Fri Jan 31, 2020 3:40 pm
I've been investing in ETFs that track MSCI World and MSCI Emerging Markets, but for some time I've been thinking if Emerging Markets really makes sense at all on the conceptual level.

MSCI World index includes 23 developed markets while MSCI Emerging Markets index includes 26 emerging markets. If I've understood correctly, MSCI decides which market is considered as developed and which as emerging. In some occasions, a market can change index, and not always for the better.

If we think that MSCI World is the top 23 markets in the world and MSCI Emerging Markets includes the 26 markets that follow, what's the point in investing in Emerging Markets? When a market improves, it will reach the point when it's taken from EM index to World, essentially making World index the premium collection and EM the "farm league".

So is investing in Emerging Markets basically by definition investing in the losing markets as the better ones will eventually leave the index?
Welcome to the forum. No, it never makes sense to invest in Emerging Markets.
Trader Joe wrote: Fri Jul 04, 2014 7:00 pm
I like and hold the Vanguard Emerging Market fund.

:oops:
Fri Jul 04, 2014? The man is allowed to change his mind over a 6 year time span.
I think the dogmatic and untenable response to the OP deserves a little historical check. Six years isn’t a terribly long investment horizon.

Mors
Posts: 220
Joined: Wed Aug 16, 2017 10:06 am

Re: Does Emerging Markets make sense?

Post by Mors » Sat Feb 01, 2020 2:05 pm


User avatar
watchnerd
Posts: 3283
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Does Emerging Markets make sense?

Post by watchnerd » Sat Feb 01, 2020 3:12 pm

marcwd wrote:
Sat Feb 01, 2020 1:33 pm

Trader Joe wrote: Fri Jul 04, 2014 7:00 pm
I like and hold the Vanguard Emerging Market fund.

:oops:
Busted!
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

theorist
Posts: 125
Joined: Sat Sep 28, 2019 11:39 am

Re: Does Emerging Markets make sense?

Post by theorist » Sat Feb 01, 2020 3:59 pm

I think the “Capital ideas” podcasts listed below here are actually somewhat enlightening about why one might invest in emerging markets. Since they are from capital group they are obviously partly trying to advertise American funds, but the general discussion is intelligent and interesting and might inform your view on emerging markets. Anyway I felt I learned something.

https://www.stitcher.com/podcast/capita ... oplay=true

https://www.thecapitalideas.com/podcast/podcast-44

User avatar
unclescrooge
Posts: 4343
Joined: Thu Jun 07, 2012 7:00 pm

Re: Does Emerging Markets make sense?

Post by unclescrooge » Sat Feb 01, 2020 4:01 pm

Trader Joe wrote:
Fri Jan 31, 2020 5:29 pm
empe wrote:
Fri Jan 31, 2020 3:40 pm
I've been investing in ETFs that track MSCI World and MSCI Emerging Markets, but for some time I've been thinking if Emerging Markets really makes sense at all on the conceptual level.

MSCI World index includes 23 developed markets while MSCI Emerging Markets index includes 26 emerging markets. If I've understood correctly, MSCI decides which market is considered as developed and which as emerging. In some occasions, a market can change index, and not always for the better.

If we think that MSCI World is the top 23 markets in the world and MSCI Emerging Markets includes the 26 markets that follow, what's the point in investing in Emerging Markets? When a market improves, it will reach the point when it's taken from EM index to World, essentially making World index the premium collection and EM the "farm league".

So is investing in Emerging Markets basically by definition investing in the losing markets as the better ones will eventually leave the index?
Welcome to the forum. No, it never makes sense to invest in Emerging Markets.
So it makes sense to ignore 90% of the world's population in your so-called passive investing portfolio?

You're also ignoring the second largest economy in the world, and our largest trading partner.

It's not necessary to include everything in your portfolio, but deliberately excluding a major asset class from a market cap weighed passive portfolio really doesn't make sense.

User avatar
unclescrooge
Posts: 4343
Joined: Thu Jun 07, 2012 7:00 pm

Re: Does Emerging Markets make sense?

Post by unclescrooge » Sat Feb 01, 2020 4:05 pm

Mors wrote:
Sat Feb 01, 2020 2:05 pm
Read this: https://www.bogleheads.org/wiki/Emerging_market_stocks
Emerging markets outperformed US stocks by 2% a year over a 20 year period? :shock:

Sounds like blasphemy on this forum! :mrgreen:

User avatar
unclescrooge
Posts: 4343
Joined: Thu Jun 07, 2012 7:00 pm

Re: Does Emerging Markets make sense?

Post by unclescrooge » Sat Feb 01, 2020 4:11 pm

empe wrote:
Sat Feb 01, 2020 8:10 am
Thanks for the feedback. I was especially interested in your views regarding the concept of index investing in emerging markets.

I've been lurking on many forums and over the course of years I don't recall ever seeing a discussion about the underlying principle of better performing markets leaving the EM index and basically lacklusters remaining there.

I know that MSCI EM index isn't needed for diversification. Some say that MSCI World isn't needed either, that S&P 500 or some other more finite index is enough.

The reason I initially started to invest in EM index was that I wanted to have as neutral and as simple strategy as possible. Something like MSCI ACWI but with World+EM as ACWI wasn't available as low cost ETF in my region. Going with just MSCI World would have meant that I expect emerging markets to shrink rather than grow.

Over time, I have become more skeptical regarding this approach as I've gained knowledge on how emerging markets work, like that government interference in China for example. Is it arrogant to expect them go become like developed markets? One position I've often come across is that investing in emerging markets is feasible only through an active fund with on-site fund manager.

Another question I find myself often asking is, would I ever buy stocks of a company located in emerging markets, or fund that tracks the index of a single emerging market country? And if the answer for those is "no", how come it's so different to invest in the full EM index?

This is a debate I've had with myself for years and probably continue to do so. I don't make changes to my investment plan lightly. My plan has actually remained the same since 2015 so I regard myself a very stagnant investor.
Do you actually live in an EM country and know any such companies?

If not, then you're basing your investing in familiarity, and excluding anything you are unfamiliar with.

There is nothing wrong with that, but I bet you probably won't know anything about 400 of the stocks in the SP500 index either.

Schlabba
Posts: 341
Joined: Sat May 11, 2019 9:14 am

Re: Does Emerging Markets make sense?

Post by Schlabba » Sat Feb 01, 2020 4:20 pm

unclescrooge wrote:
Sat Feb 01, 2020 4:01 pm
Trader Joe wrote:
Fri Jan 31, 2020 5:29 pm
empe wrote:
Fri Jan 31, 2020 3:40 pm
I've been investing in ETFs that track MSCI World and MSCI Emerging Markets, but for some time I've been thinking if Emerging Markets really makes sense at all on the conceptual level.

MSCI World index includes 23 developed markets while MSCI Emerging Markets index includes 26 emerging markets. If I've understood correctly, MSCI decides which market is considered as developed and which as emerging. In some occasions, a market can change index, and not always for the better.

If we think that MSCI World is the top 23 markets in the world and MSCI Emerging Markets includes the 26 markets that follow, what's the point in investing in Emerging Markets? When a market improves, it will reach the point when it's taken from EM index to World, essentially making World index the premium collection and EM the "farm league".

So is investing in Emerging Markets basically by definition investing in the losing markets as the better ones will eventually leave the index?
Welcome to the forum. No, it never makes sense to invest in Emerging Markets.
So it makes sense to ignore 90% of the world's population in your so-called passive investing portfolio?

You're also ignoring the second largest economy in the world, and our largest trading partner.

It's not necessary to include everything in your portfolio, but deliberately excluding a major asset class from a market cap weighed passive portfolio really doesn't make sense.
John Bogle recommended a 100% developed market portfolio for american investors, clearly he didn't make sense. :oops:

You don't need emerging markets. If you leave them out it will have a minimal impact on your investment returns. We're talking about +/-12% of global market cap here.
Much more important are savings rate, asset allocation and staying the course.

User avatar
unclescrooge
Posts: 4343
Joined: Thu Jun 07, 2012 7:00 pm

Re: Does Emerging Markets make sense?

Post by unclescrooge » Sat Feb 01, 2020 4:22 pm

Schlabba wrote:
Sat Feb 01, 2020 4:20 pm
unclescrooge wrote:
Sat Feb 01, 2020 4:01 pm
Trader Joe wrote:
Fri Jan 31, 2020 5:29 pm
empe wrote:
Fri Jan 31, 2020 3:40 pm
I've been investing in ETFs that track MSCI World and MSCI Emerging Markets, but for some time I've been thinking if Emerging Markets really makes sense at all on the conceptual level.

MSCI World index includes 23 developed markets while MSCI Emerging Markets index includes 26 emerging markets. If I've understood correctly, MSCI decides which market is considered as developed and which as emerging. In some occasions, a market can change index, and not always for the better.

If we think that MSCI World is the top 23 markets in the world and MSCI Emerging Markets includes the 26 markets that follow, what's the point in investing in Emerging Markets? When a market improves, it will reach the point when it's taken from EM index to World, essentially making World index the premium collection and EM the "farm league".

So is investing in Emerging Markets basically by definition investing in the losing markets as the better ones will eventually leave the index?
Welcome to the forum. No, it never makes sense to invest in Emerging Markets.
So it makes sense to ignore 90% of the world's population in your so-called passive investing portfolio?

You're also ignoring the second largest economy in the world, and our largest trading partner.

It's not necessary to include everything in your portfolio, but deliberately excluding a major asset class from a market cap weighed passive portfolio really doesn't make sense.
John Bogle recommended a 100% developed market portfolio for american investors, clearly he didn't make sense. :oops:

You don't need emerging markets. If you leave them out it will have a minimal impact on your investment returns. We're talking about +/-12% of global market cap here.
Much more important are savings rate, asset allocation and staying the course.
You can ignore it. But it is not a passive portfolio. It is an active portfolio with a tilt towards US listed companies.

User avatar
watchnerd
Posts: 3283
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Does Emerging Markets make sense?

Post by watchnerd » Sat Feb 01, 2020 4:25 pm

unclescrooge wrote:
Sat Feb 01, 2020 4:11 pm

Do you actually live in an EM country and know any such companies?

If not, then you're basing your investing in familiarity, and excluding anything you are unfamiliar with.

There is nothing wrong with that, but I bet you probably won't know anything about 400 of the stocks in the SP500 index either.
I'm curious to see when / if Saudi ARAMCO appears in the EM indexes, now that it has IPO'ed, and how that changes the market cap weightings.

Given at $2 trillion USD it is now the world's most valuable company.

If you're US-only, you won't get a piece of it.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

SlowMovingInvestor
Posts: 1726
Joined: Sun Sep 11, 2016 11:27 am

Re: Does Emerging Markets make sense?

Post by SlowMovingInvestor » Sat Feb 01, 2020 4:29 pm

watchnerd wrote:
Sat Feb 01, 2020 4:25 pm
unclescrooge wrote:
Sat Feb 01, 2020 4:11 pm

Do you actually live in an EM country and know any such companies?

If not, then you're basing your investing in familiarity, and excluding anything you are unfamiliar with.

There is nothing wrong with that, but I bet you probably won't know anything about 400 of the stocks in the SP500 index either.
I'm curious to see when Saudi ARAMCO appears in the EM indexes, now that it has IPO'ed, and how that changes the market cap weightings.

Given at $2 trillion USD it is now the world's most valuable company.

If you're US-only, you won't get a piece of it.
I don't think Saudi Arabia is included in EM ETFs. Maybe in some Frontier ETFs.

User avatar
watchnerd
Posts: 3283
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Does Emerging Markets make sense?

Post by watchnerd » Sat Feb 01, 2020 4:31 pm

SlowMovingInvestor wrote:
Sat Feb 01, 2020 4:29 pm
watchnerd wrote:
Sat Feb 01, 2020 4:25 pm
unclescrooge wrote:
Sat Feb 01, 2020 4:11 pm

Do you actually live in an EM country and know any such companies?

If not, then you're basing your investing in familiarity, and excluding anything you are unfamiliar with.

There is nothing wrong with that, but I bet you probably won't know anything about 400 of the stocks in the SP500 index either.
I'm curious to see when Saudi ARAMCO appears in the EM indexes, now that it has IPO'ed, and how that changes the market cap weightings.

Given at $2 trillion USD it is now the world's most valuable company.

If you're US-only, you won't get a piece of it.
I don't think Saudi Arabia is included in EM ETFs. Maybe in some Frontier ETFs.
Incorrect.

Saudi Arabia is part of VWO/VEMAX, the Vanguard Emerging Markets Index Fund.

https://investor.vanguard.com/etf/profile/portfolio/vwo
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

SlowMovingInvestor
Posts: 1726
Joined: Sun Sep 11, 2016 11:27 am

Re: Does Emerging Markets make sense?

Post by SlowMovingInvestor » Sat Feb 01, 2020 4:36 pm

watchnerd wrote:
Sat Feb 01, 2020 4:31 pm
Incorrect.

Saudi Arabia is part of VWO/VEMAX, the Vanguard Emerging Markets Index Fund.

https://investor.vanguard.com/etf/profile/portfolio/vwo
I stand corrected. I was looking at the iShares ETF IEMG, which includes only 'investable' markets, and does not include Saudi Arabia.

TomCat96
Posts: 936
Joined: Sun Oct 18, 2015 12:18 pm

Re: Does Emerging Markets make sense?

Post by TomCat96 » Sat Feb 01, 2020 4:45 pm

empe wrote:
Fri Jan 31, 2020 3:40 pm
I've been investing in ETFs that track MSCI World and MSCI Emerging Markets, but for some time I've been thinking if Emerging Markets really makes sense at all on the conceptual level.

MSCI World index includes 23 developed markets while MSCI Emerging Markets index includes 26 emerging markets. If I've understood correctly, MSCI decides which market is considered as developed and which as emerging. In some occasions, a market can change index, and not always for the better.

If we think that MSCI World is the top 23 markets in the world and MSCI Emerging Markets includes the 26 markets that follow, what's the point in investing in Emerging Markets? When a market improves, it will reach the point when it's taken from EM index to World, essentially making World index the premium collection and EM the "farm league".

So is investing in Emerging Markets basically by definition investing in the losing markets as the better ones will eventually leave the index?

+1

Bogle himself never anticipated the level zeal to theoretical purity of investing solely in all markets at market cap. In contrast, Bogle himself advocated for 20% international while favoring US markets.

We have to at times remember why Bogle's formula even works. He has said it in recent years. We are passive investors, relying on active management to fairly and accurately value the markets. In other words, we are price takers of the sum average of active management decisions.

That means the quality of boglehead portfolio is directly proportional to the quality (and so often quantity) of active management ongoing with respect to markets. Where there is less active management, there are fewer eyes judging the fair and accurate pricing of the securities This is practically true by definition with respect to EM. These are less developed markets, with fewer eyes, less capital, and lighter scrutiny to judgment the value of these investments. It stands to reason that boglehead-passively accepting whatever price is given to you by the aggregate will also give you poorer and more inconsistent results.

Schlabba
Posts: 341
Joined: Sat May 11, 2019 9:14 am

Re: Does Emerging Markets make sense?

Post by Schlabba » Sat Feb 01, 2020 4:50 pm

unclescrooge wrote:
Sat Feb 01, 2020 4:22 pm
Schlabba wrote:
Sat Feb 01, 2020 4:20 pm
unclescrooge wrote:
Sat Feb 01, 2020 4:01 pm
Trader Joe wrote:
Fri Jan 31, 2020 5:29 pm
empe wrote:
Fri Jan 31, 2020 3:40 pm
I've been investing in ETFs that track MSCI World and MSCI Emerging Markets, but for some time I've been thinking if Emerging Markets really makes sense at all on the conceptual level.

MSCI World index includes 23 developed markets while MSCI Emerging Markets index includes 26 emerging markets. If I've understood correctly, MSCI decides which market is considered as developed and which as emerging. In some occasions, a market can change index, and not always for the better.

If we think that MSCI World is the top 23 markets in the world and MSCI Emerging Markets includes the 26 markets that follow, what's the point in investing in Emerging Markets? When a market improves, it will reach the point when it's taken from EM index to World, essentially making World index the premium collection and EM the "farm league".

So is investing in Emerging Markets basically by definition investing in the losing markets as the better ones will eventually leave the index?
Welcome to the forum. No, it never makes sense to invest in Emerging Markets.
So it makes sense to ignore 90% of the world's population in your so-called passive investing portfolio?

You're also ignoring the second largest economy in the world, and our largest trading partner.

It's not necessary to include everything in your portfolio, but deliberately excluding a major asset class from a market cap weighed passive portfolio really doesn't make sense.
John Bogle recommended a 100% developed market portfolio for american investors, clearly he didn't make sense. :oops:

You don't need emerging markets. If you leave them out it will have a minimal impact on your investment returns. We're talking about +/-12% of global market cap here.
Much more important are savings rate, asset allocation and staying the course.
You can ignore it. But it is not a passive portfolio. It is an active portfolio with a tilt towards US listed companies.
So if OP only invests in the MSCI World and leaves out MSCI EM you call that an active portfolio?

Lets agree to disagree there.

alex_686
Posts: 5297
Joined: Mon Feb 09, 2015 2:39 pm

Re: Does Emerging Markets make sense?

Post by alex_686 » Sat Feb 01, 2020 4:52 pm

SlowMovingInvestor wrote:
Sat Feb 01, 2020 4:36 pm
watchnerd wrote:
Sat Feb 01, 2020 4:31 pm
Incorrect.

Saudi Arabia is part of VWO/VEMAX, the Vanguard Emerging Markets Index Fund.

https://investor.vanguard.com/etf/profile/portfolio/vwo
I stand corrected. I was looking at the iShares ETF IEMG, which includes only 'investable' markets, and does not include Saudi Arabia.
Saudi Arabia made a big push to upgrade its market prior to the IPO of Saudi Aramco.

User avatar
unclescrooge
Posts: 4343
Joined: Thu Jun 07, 2012 7:00 pm

Re: Does Emerging Markets make sense?

Post by unclescrooge » Sat Feb 01, 2020 4:53 pm

watchnerd wrote:
Sat Feb 01, 2020 4:25 pm
unclescrooge wrote:
Sat Feb 01, 2020 4:11 pm

Do you actually live in an EM country and know any such companies?

If not, then you're basing your investing in familiarity, and excluding anything you are unfamiliar with.

There is nothing wrong with that, but I bet you probably won't know anything about 400 of the stocks in the SP500 index either.
I'm curious to see when / if Saudi ARAMCO appears in the EM indexes, now that it has IPO'ed, and how that changes the market cap weightings.

Given at $2 trillion USD it is now the world's most valuable company.

If you're US-only, you won't get a piece of it.
Isn't it more of a frontier country?
At a 2 trillion market cap, I'm not sure I would want any exposure anyway.

User avatar
watchnerd
Posts: 3283
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Does Emerging Markets make sense?

Post by watchnerd » Sat Feb 01, 2020 4:55 pm

Schlabba wrote:
Sat Feb 01, 2020 4:50 pm

So if OP only invests in the MSCI World and leaves out MSCI EM you call that an active portfolio?

Lets agree to disagree there.
William Sharpe thinks investing in anything other than the global market cap is an active decision to tilt the portfolio.

https://www.youtube.com/watch?v=XsXOLZ9U7jI
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

User avatar
unclescrooge
Posts: 4343
Joined: Thu Jun 07, 2012 7:00 pm

Re: Does Emerging Markets make sense?

Post by unclescrooge » Sat Feb 01, 2020 5:04 pm

Schlabba wrote:
Sat Feb 01, 2020 4:50 pm
unclescrooge wrote:
Sat Feb 01, 2020 4:22 pm
Schlabba wrote:
Sat Feb 01, 2020 4:20 pm
unclescrooge wrote:
Sat Feb 01, 2020 4:01 pm
Trader Joe wrote:
Fri Jan 31, 2020 5:29 pm


Welcome to the forum. No, it never makes sense to invest in Emerging Markets.
So it makes sense to ignore 90% of the world's population in your so-called passive investing portfolio?

You're also ignoring the second largest economy in the world, and our largest trading partner.

It's not necessary to include everything in your portfolio, but deliberately excluding a major asset class from a market cap weighed passive portfolio really doesn't make sense.
John Bogle recommended a 100% developed market portfolio for american investors, clearly he didn't make sense. :oops:

You don't need emerging markets. If you leave them out it will have a minimal impact on your investment returns. We're talking about +/-12% of global market cap here.
Much more important are savings rate, asset allocation and staying the course.
You can ignore it. But it is not a passive portfolio. It is an active portfolio with a tilt towards US listed companies.
So if OP only invests in the MSCI World and leaves out MSCI EM you call that an active portfolio?

Lets agree to disagree there.
It may be sufficiently diversified to hold in a portfolio, but a world portfolio that includes less than 20% of the world population has a rather active tilt.

We didn't need to agree on anything.

But the whole premise of passive investing to hold the haystack. You can't subdivide the haystack, throw half of it out, and still call it passive. :oops:

User avatar
unclescrooge
Posts: 4343
Joined: Thu Jun 07, 2012 7:00 pm

Re: Does Emerging Markets make sense?

Post by unclescrooge » Sat Feb 01, 2020 5:04 pm

watchnerd wrote:
Sat Feb 01, 2020 4:55 pm
Schlabba wrote:
Sat Feb 01, 2020 4:50 pm

So if OP only invests in the MSCI World and leaves out MSCI EM you call that an active portfolio?

Lets agree to disagree there.
William Sharpe thinks investing in anything other than the global market cap is an active decision to tilt the portfolio.

https://www.youtube.com/watch?v=XsXOLZ9U7jI
+1

Schlabba
Posts: 341
Joined: Sat May 11, 2019 9:14 am

Re: Does Emerging Markets make sense?

Post by Schlabba » Sat Feb 01, 2020 5:30 pm

unclescrooge wrote:
Sat Feb 01, 2020 5:04 pm
Schlabba wrote:
Sat Feb 01, 2020 4:50 pm
unclescrooge wrote:
Sat Feb 01, 2020 4:22 pm
Schlabba wrote:
Sat Feb 01, 2020 4:20 pm
unclescrooge wrote:
Sat Feb 01, 2020 4:01 pm

So it makes sense to ignore 90% of the world's population in your so-called passive investing portfolio?

You're also ignoring the second largest economy in the world, and our largest trading partner.

It's not necessary to include everything in your portfolio, but deliberately excluding a major asset class from a market cap weighed passive portfolio really doesn't make sense.
John Bogle recommended a 100% developed market portfolio for american investors, clearly he didn't make sense. :oops:

You don't need emerging markets. If you leave them out it will have a minimal impact on your investment returns. We're talking about +/-12% of global market cap here.
Much more important are savings rate, asset allocation and staying the course.
You can ignore it. But it is not a passive portfolio. It is an active portfolio with a tilt towards US listed companies.
So if OP only invests in the MSCI World and leaves out MSCI EM you call that an active portfolio?

Lets agree to disagree there.
It may be sufficiently diversified to hold in a portfolio, but a world portfolio that includes less than 20% of the world population has a rather active tilt.

We didn't need to agree on anything.

But the whole premise of passive investing to hold the haystack. You can't subdivide the haystack, throw half of it out, and still call it passive. :oops:
What does population have to do with anything? Its the public stock markets that matter.

Passive investing is indexing according to market weight.

The haystack according to John Bogle was the US market. The haystack according to Taylor is including EM. You don’t get to define the haystack and tell everyone else they are doing some kind of ‘active investing’ if they disagree. Even our experts disagree.

tea_pirate
Posts: 190
Joined: Mon Dec 03, 2018 7:29 am

Re: Does Emerging Markets make sense?

Post by tea_pirate » Sat Feb 01, 2020 5:32 pm

Welcome to the Bogleheads forum, where users will argue about the same 4 topics until they're blue in the face and everybody walks away convinced that they're right.

OP has opened a particularly interesting can of worms. We have all the usual arguments from the weekly "USA #1 forever - international sucks" thread here, but distilled down into high octane beliefs regarding ones personal opinions of emerging markets.

Fascinating.

alex_686
Posts: 5297
Joined: Mon Feb 09, 2015 2:39 pm

Re: Does Emerging Markets make sense?

Post by alex_686 » Sat Feb 01, 2020 5:48 pm

A note on John Bogle’s opinion. Markets change.

40 years ago there was a firm split between the blue chip NYSE (stocks of quality) and the smaller low quality OTC NASDAQ stocks. NASDAQ had lower listings requirements. If that distinction is dead, it is more of a historical artifact.

20 years ago US, International, and EM designations had real meaning. This designation had real significant statical power. But these catalog’s powers are fading.

While Mr. Bogle’s opinion might have been valid yesterday, it does not mean it will be in the future.

Call_Me_Op
Posts: 7466
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Does Emerging Markets make sense?

Post by Call_Me_Op » Sat Feb 01, 2020 5:50 pm

Recency bias anyone?
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

retiredjg
Posts: 39368
Joined: Thu Jan 10, 2008 12:56 pm

Re: Does Emerging Markets make sense?

Post by retiredjg » Sat Feb 01, 2020 6:11 pm

Call_Me_Op wrote:
Sat Feb 01, 2020 5:50 pm
Recency bias anyone?
I don't think so in this particular case. it seems to be an unresolved philosophical decision (see poster's second post).

But 99% of the time, I think these questions definitely are the result of recency bias.

User avatar
watchnerd
Posts: 3283
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Does Emerging Markets make sense?

Post by watchnerd » Sat Feb 01, 2020 7:50 pm

alex_686 wrote:
Sat Feb 01, 2020 5:48 pm
A note on John Bogle’s opinion. Markets change.

40 years ago there was a firm split between the blue chip NYSE (stocks of quality) and the smaller low quality OTC NASDAQ stocks. NASDAQ had lower listings requirements. If that distinction is dead, it is more of a historical artifact.

20 years ago US, International, and EM designations had real meaning. This designation had real significant statical power. But these catalog’s powers are fading.

While Mr. Bogle’s opinion might have been valid yesterday, it does not mean it will be in the future.
Because of globalization and investment occurring on a worldwide basis, we may be approaching a situation where the Frontier Markets of the 21st century are more analogous to the Emerging Markets of the 20th within a few decades.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

User avatar
BroIceCream
Posts: 68
Joined: Tue Oct 30, 2018 11:31 pm
Location: California

Re: Does Emerging Markets make sense?

Post by BroIceCream » Sat Feb 01, 2020 10:23 pm

A U.S.-only haystack is not diverse enough for me, nor a pure market-cap. I prefer to diversify the weighting across several more uncorrelated asset classes to temper the market volatility/risk.

The Callan Periodic table is very illustrative: https://www.callan.com/periodic-table/

User avatar
Stef
Posts: 416
Joined: Thu Oct 10, 2019 10:13 am

Re: Does Emerging Markets make sense?

Post by Stef » Sat Feb 01, 2020 11:26 pm

Any good FM ETF?

User avatar
BroIceCream
Posts: 68
Joined: Tue Oct 30, 2018 11:31 pm
Location: California

Re: Does Emerging Markets make sense?

Post by BroIceCream » Sun Feb 02, 2020 12:39 am

Stef wrote:
Sat Feb 01, 2020 11:26 pm
Any good FM ETF?
Here are a few from different sources. I'm at Fidelity, so I use the iShares ETFs, or Fido MF.
ETF: DGS, VWO, IEMG, EEMS
MF: VEMAX, FPADX, SFENX

Post Reply