Dynamic Wealth Solutions
Timothy Hooker uses emerging markets as his clients’ only exposure to international markets at this time, with holdings representing 10-15% of a client’s equity allocation.
His clients generally are aggressive investors driven by performance. It’s one of the reasons Hooker doesn’t use broad-based emerging market ETFs, and instead uses niche and sector funds instead.
“Our clients say they want emerging market exposure because they see this as an opportunity for the long term,” he said. “Our investors are aggressive. They like to see performance and capital appreciation, and we believe that the ETF is a great way to capture that return.”
Hooker uses KWEB to target the growth in the rise of the Chinese middle class and their increased discretionary income. The expense ratio for KWEB is 76 basis points, which he admits is expensive, but says that the return justifies the higher fee.
“It’s not as diverse as some of the Vanguard and SPDR funds,” he explained. “These are high-conviction funds: 61% of KWEB’s holdings are in in the top 10.”
For clients who want less China exposure or want more exposure to India, Hooker says FNI fits the bill. He sees the ETF as a good way to diversify away from China and still post strong returns.
Even though these are concentrated ETFs, Hooker uses them as core emerging market positions. And these two funds get his clients interested in emerging market investing.
“When we started our firm six years ago, we used funds like SPEM [SPDR Portfolio Emerging Markets ETF] and DEM.” Hooker noted, “But we couldn’t get clients excited about them as much as we can with KWEB and FNI.”
Principal, Managing Director
Sage Advisory Services
On the equity side of a client’s portfolio, Rob Williams allocates between 60% domestic stock and 40% international, with about 10% in emerging market ETFs, generally. He prefers broad-based ETFs, but will occasionally tilt to add regional exposure.
Williams says right now there are a few good reasons to have emerging market holdings, including monetary policy, a weaker dollar and attractive valuations. Looking toward the end of the year, he’s more cautious, because of the coming election and tensions between the U.S. and China.
The iShares Core MSCI Emerging Markets ETF (IEMG) is Williams’ pick for core emerging market exposure, and he currently has a tilt toward Asia, using the iShares MSCI Emerging Markets Asia ETF (EEMA) to express that view.
For investors with an income focus, he’s used the DEM, and for clients with an environmental, social and governance mandate, the iShares ESG MSCI EM ETF (ESGE) fits the bill.
On the fixed income side, Williams will either choose a dollar-based ETF or one that’s based on the local currency, depending on his view. He cautions that advisors need to be aware of the exchange rate impact on the fixed income side.
William’s core fixed income emerging market ETFs are either the iShares JP Morgan USD Emerging Markets Bond ETF (EMB) or the Invesco Emerging Markets Sovereign Debt ETF (PCY). PCY is similar to EMB, he explains, but the nuance with PCY is that it’s all sovereign debt: “EMB has a little corporate debt mixed in there, so if we want a broader base, but want to include some credit, we’ll use that one.”
Those two are dollar-denominated, so there’s no currency bet. If Williams has a view on the dollar weakening, or wants exposure to local currency, his pick is the VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC).