Most investors have a home bias, investing in their own country’s stock market instead of diversifying geographically, but investing in Europe right now requires in-depth research to make sure that companies will pull through in case of a triple-dip recession. But you can still branch out if you’re willing to move into frontier and emerging markets.
“Emerging countries may be at varying stages of development and may experience dramatically different returns over time. Not all emerging markets will provide the same ride,” writes Schwab Center for Financial Research VP Anthony Davidow.
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Emerging markets: Indexes as a starting point
Dividing emerging markets into groups like BRICs (Brazil, Russia, India, China); the Next-11 (South Korea, Mexico, Indonesia, Turkey, Nigeria, Vietnam, the Philippines, Iran, Egypt, Pakistan, and Bangladesh), and others may be useful shorthand for the size of different economies, but the differences are still pretty stark. After all, any list that contains South Korea, Nigeria, and Iran is anything but homogeneous, and the mix of top performing emerging markets changes every year, as the above chart shows. Only Colombia has topped the list twice in the last decade, but they’ve also had some double-digit declines in recent years as well, so there really isn’t a sure thing.
Davidow warns that most individual investors don’t have the time or resources to properly research EM stocks, and mentions the Russell EM Index and the Schwab Fundamental EM Large Company Index as two easy options (he has a product to sell, after all). But even if you aren’t interested EM ETFs, checking their exposure and holdings can give you an idea of where to start looking.
EM ETF top performers turns up some less commonly known stocks
As a market-cap weighted index, the Russell emerging markets Index’s biggest holding is Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930), and most of the other top ten are other familiar Asian heavyweights like China Mobile Ltd. (NYSE:CHL) (HKG:0941), Tencent Holdings Ltd (HKG:0700), and Baidu Inc (ADR) (NASDAQ:BIDU), but the index’s top performers has less familiar names that could be worth further research.
Schwab’s Fundamental EM Large Company Index weight stocks on adjusted sales, retained operating cash flow, and dividends plus buybacks instead of looking solely at market cap, but restricting to large-caps as its investment universe means that China Mobile Ltd. (NYSE:CHL) (HKG:0941), Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930), and Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) (TPE:2330) still make it into the top 10 holdings.