Alternative Investments: The Case for Emerging Market ETFs

A report by Andrew Hallam says emerging market ETFs are a great deal now.

Most investors make the mistake of backing ETFs based on their recent historical returns, not realizing that they may be overvalued at current prices. Comparing stock returns from US stocks and those in emerging markets (EM), it turns out that over the really long term, these are nearly the same.

Hallam observes that between January 1988 and May 31, 2020, EM saw an average return of 10.15% per year, while the S&P 500 averaged 10.69%. (The Globe and Mail)

Performance varies widely at times

However, in between, during various periods, the performance varies. “Sometimes, U.S. stocks win. Other times, emerging markets take the prize. It depends on what period you’re measuring,” says Hallam.

For example, during the decade ended 1999, US stocks beat emerging markets by a handsome margin. However, the tables turned in the following decade ended 2009 – a $10,000 investment in U.S. stocks dropped to $6,625, while a $10,000 investment in emerging-market shares soared to $18,922. Thereafter, during the 10 years ended December 2019, the S&P 500 (in C$) delivered 15.98%, but EM limped home with just 6.28%.

Robert Shiller’s cyclically adjusted price-to-earnings ratio (CAPE)

Shiller’s CAPE measures inflation-adjusted earnings over several years and compares those average earnings with current price levels.

“When a stock market is trading far above its historical average CAPE level, poor returns usually follow for the decade ahead,” observes Hallam. “When stocks trade far below their average CAPE, it usually bodes well for the next 10 years.”

Currently, U.S. stocks are trading at a Shiller CAPE of nearly 30. In contrast, EM stocks are at a shade below 14.

CAPE ratios have strong correlations with future decade-long returns, and the last time such a variation in the ratio occurred, U.S. stocks “sputtered for a decade, while EM soared.”

Meanwhile, dividend yields on U.S. stocks are near 129-year lows.

“Emerging markets might be poised for another decade-long win,” concludes Hallam.

Related Story:  Emerging Market Economies (And ETFs) To Benefit From The Oil Crash

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