Indexing [investor in Emerging Market country]

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CarpeDiem22
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Joined: Tue May 22, 2018 11:20 pm

Indexing [investor in Emerging Market country]

Post by CarpeDiem22 » Wed May 23, 2018 12:19 am

Dear all
I'm a married 31 year-old, born, living and investing in one of the emerging market countries. I started work at 26 and my current net worth is around 25% of my goal net worth for retirement. Requesting a little feedback on possible solutions I came up with for my little issue.

The issue: Vanguard is not available in my country (Imagine investing without Vanguard!).

Current situation: All my investments are in actively managed equity funds at around 1.2% TER (covering large, mid and small cap stocks), and actively managed bond funds at around 0.3% TER. I cringe when I calculate and arrive at the actual amount I'm paying as fund fees.

Possible Solutions:
1. Index funds other than Vanguard: I have access to index funds at around 0.15% TER, but this index covers only largest 50 stocks and about 63% of free-float market capitalisation of the stock market. There is another index fund that covers next 50 largest stocks and about 11% of free-float market capitalisation at 0.4% TER. I feel these are not broad enough for a long-term investment perspective.

2. ETFs: New ETFs are starting to be launched by reputed sponsors covering 50, 100 and even 500 stocks now. A large discount broker allows me to invest in these for zero brokerage, but I'm concerned about the liquidity of these ETFs. These ETFs usually trade for up to 0.4% premium/discount to the NAV. The sponsor agrees to liquidate them directly if they are trading at more than 3% discount to NAV for more than 30 days (very helpful when blood is running on the streets, although I'm planning not to exit equity investments when the situation is so).

Should I use index funds, and a core and explore strategy (invest partially in 50-stock index fund and partially in actively managed mid and small cap funds), or should I go ahead and invest in 500-stock ETF and hope for ample liquidity at financial markets develops and liquidity improves?

Thank you in advance for any feedback you may have.

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whodidntante
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Re: Emerging Market Indexing

Post by whodidntante » Wed May 23, 2018 6:09 am

Mutual funds and ETFs get liquidated fairly often, usually because they couldn't attract a critical mass of investment. Also sometimes funds are merged into other funds.

It's not likely that an ETF will trade at a 3% discount for 30 days. That would be a good risk free money maker for authorized participants, and they'll take free money when you offer it to them.

I suggest looking into whether Interactive Brokers would take you as a brokerage customer, and the tax impact of owning foreign domiciled funds. If those things work out in your favor, you can potentially access diversified low-cost investments.

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BeBH65
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Re: Emerging Market Indexing

Post by BeBH65 » Wed May 23, 2018 6:32 am

Hello carpe diem,

Welcome to the forum.
Congratulations on the progress you have already made to your investment goals.

The Bogleheads principles are universally applicable.
There are many countries where Vanguard is not readily available, and where we need to look for alternatives.

Please consider updating the title of your opening post to include the name of your country, or at least something like " index investing from an emerging country".

Are you able to invest in foreign stock exchanges: for instance the London Stock Exchange?
This might be a way for you to invest in known-good Etf's .
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

manedark
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Re: Emerging Market Indexing

Post by manedark » Wed May 23, 2018 10:42 am

Do note that Index Investing is not always a good option for countries which don't have efficient markets.
That means there are some market participants having more knowledge than others - corruption, loose regulations etc. I asked tbis question in another forum in my home country and data I was given is that index funds are not able to beat actively managed funds - even when the active management is as small as removing 2-3 laggards from the index.

WhiteMaxima
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Re: Emerging Market Indexing

Post by WhiteMaxima » Wed May 23, 2018 11:43 am

Never invest in a single emerging country. also don't under or over invest in emerging market. If you asset is in USD, there are currency risks. Invest in a broad based index fund or ETF (such as VT).

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triceratop
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Re: Indexing [investor in Emerging Market country]

Post by triceratop » Wed May 23, 2018 11:55 am

Hi CarpeDiem22,
I retitled your thread to more clearly indicate that you are an investor who lives in an EM-designated country rather than the question of investing into EM-designated markets.

Welcome!
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

CarpeDiem22
Posts: 139
Joined: Tue May 22, 2018 11:20 pm

Re: Emerging Market Indexing

Post by CarpeDiem22 » Sun May 27, 2018 1:18 am

Sorry for late reply. Was figuring out how to add multiple quotes in a post.
whodidntante wrote:
Wed May 23, 2018 6:09 am
I suggest looking into whether Interactive Brokers would take you as a brokerage customer, and the tax impact of owning foreign domiciled funds. If those things work out in your favor, you can potentially access diversified low-cost investments.
A quick look at their website tells me that I'll be accepted as a customer. I'll find out the costs associated and the tax impact. Thanks, whodidntante.
BeBH65 wrote wrote: Are you able to invest in foreign stock exchanges: for instance the London Stock Exchange?
This might be a way for you to invest in known-good Etf's .
Thanks, BeBH65. I can, through Interactive Brokers I believe, but need to find out the costs and the tax impact. Emerging countries are capital-scarce and don't like people to move their capital abroad and hence higher taxes on overseas investments.
manedark wrote wrote: Do note that Index Investing is not always a good option for countries which don't have efficient markets.
That means there are some market participants having more knowledge than others - corruption, loose regulations etc. I asked tbis question in another forum in my home country and data I was given is that index funds are not able to beat actively managed funds - even when the active management is as small as removing 2-3 laggards from the index.
What you're saying is certainly true, manedark. However, in my observation, corruption and insider information etc. are illegal and hence not systematic and country-wide. What IS systematic is funds cheating their benchmarks (loose regulation), meaning that a fund with large cap benchmark may buy some midcap or small cap stocks to boost its return. This regulation is being fixed in my country so I wouldn't worry about it anymore. One more thing that is of relevance is that even though many active funds beat index funds in emerging countries, the performance is not consistent and top fund keep changing every year, further pushing me towards indexing.
WhiteMaxima wrote wrote: Never invest in a single emerging country. also don't under or over invest in emerging market. If you asset is in USD, there are currency risks. Invest in a broad based index fund or ETF (such as VT).
Agree, WhiteMaxima. Searching for best way forward in this direction.
triceratop wrote wrote: I retitled your thread to more clearly indicate that you are an investor who lives in an EM-designated country rather than the question of investing into EM-designated markets.
Thanks, triceratop. It is clearer this way.

msk
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Re: Indexing [investor in Emerging Market country]

Post by msk » Sun May 27, 2018 1:43 am

Opening an account with Interactive Brokers will very likely solve all your problems. E.g. If your local taxes target dividends, then just buy accumulating (non dividend paying ETFs) so you have only capital gains taxed only when you start cashing in after retirement. I am very wary of funds that target a small EM country. If you are forced into investing only in your own country, and if your country is so small that it is not even in an EM index, be doubly wary. You will be far better off investing in individual stocks, anything between 5 and 10, that you yourself have carefully vetted over months and years. People in tiny markets tend to be very skeptical and cynical of the stock market (justifiably so because of insider trading) hence you can sometimes find gems going cheap, e.g. a local utility with steady earnings but paying an 8% dividend yield at a P/E of < 10. Or whatever. Takes much more effort to identify, but can work out very profitable compared to some dubious mutual fund set up to rape local pension funds.

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