Emerging markets are hot, but choosing the right ETF can make them even hotter, IU’s Hougan says.
The vast majority of investors may not realize they own the wrong emerging markets ETF, and switching into the right one can make prospective investment opportunities in the developing world even better, IndexUniverse President of ETF Analytics Matt Hougan said in a recent appearance on CNBC.
IEMG, GXC And EMLC
On the equities side, Hougan touted the SPDR China ETF (NYSEArca: GXC) as well as the iShares MSCI Core Emerging Markets ETF (NYSEArca: IEMG). He said both GXC and IEMG drilled into smaller-cap holdings, meaning investors gain access to more entrepreneurial pockets of developing markets and not just the biggest firms, which is what first generation funds have done.
“About 80 to 90 percent of investors are in the wrong emerging-markets ETF,” Hougan told CNBC studio journalists. “They should shift into one that has small-cap exposure.”
He noted that the small-cap exposure in the new iShares Core IEMG has helped it outperform its older and more expensive sibling, the iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM) by 3 percentage points in the past three months.
Elsewhere in the emerging markets, Hougan said local currency bond ETFs, such as the Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC) were a relatively safe and effective way to find decent yields at a time when benchmark Treasury debt isn’t yielding much at all.
“I think this is a no-brainer. You get better balance sheets, better growth and a significantly higher yield—and I mean significantly: 1 percent versus 5 percent. I think this is a trade not just for next year, but for the next 10 year,” Hougan said.
Playing The Yen
Much has been made of Japan’s plans to weaken the yen in hopes of boosting its legendary export sector. But it’s not clear that enough investors understand how currencies can affect returns.
Hougan said first-generation ETFs, such as the iShares MSCI Japan Index Fund (NYSEArca: EWJ), leave investors long the yen, which can be terribly deleterious to returns when the Japanese currency is losing value relative to the dollar, as it has in the past few months.
He pointed to the perfect answer in an ETF wrapper, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ), which pulls the dollar-yen cross entirely out of the returns profile.
“DXJ gives you that good upside exposure to Japanese stocks, but shorts out the yen exposure. You get the best of both worlds. It’s definitely a solid pick for next year.”
Hougan also singled out the Global X SuperDividend ETF (NYSEArca: SDIV), saying it represented an expansion into high-yielding international equities.
The fund takes the 100-largest-dividend-paying companies in the world, adjusts slightly for dividend sustainability and pays an 8-plus percent yield.
That’s a lot more than the 5 percent that the most high-yielding domestic dividend-focused ETF delivers.