Emerging markets as measured by the MSCI Emerging Markets Index have fallen some 8.6% year to date vs. 1.5% for S&P 500. Does that mean now's time to buy emerging-market stocks?
Well, forecasters say that while the U.S. middle class appears set to shrink in the years ahead, the global middle class seems likely to expand going forward. According to the Brookings Institute, the worldwide middle class is set to grow by 160 million people per year on average through 2030. That means the worldwide middle class with reach 4.9 billion people by 2030, up from just 1.8 billion as recently as 2009.
Almost 90% of the next 1 billion new middle-class members will come from Asia -- 380 million Indians, 350 million Chinese, and 210 million people from other Asian lands. By contrast, analysts expect North America and Europe to account for only a fifth of the world's middle-class population by 2030, down from more than half in 2010.
And as the middle class goes, so goes personal consumption. Market watchers expect Europe and North America to account for just 30% of the world's middle-class consumption by 2030, compared to 64% in 2010. Instead, nearly 60% of middle-class consumption will come from Asia -- with India and China alone accounting for more than two-thirds of that.
By way of comparison, Asia represented just 23% of global middle-class consumption in 2010. Is it any wonder that CEO Tim Cook of Apple (AAPL) has talked about India's long-term favorable demand dynamics and what that could mean for his firm?
Forecasts for sales of refrigerators, washing machines and other kitchen appliances often cite Asia as one of the key growth markets, but demand for these items has also surged in virtually every African country as well. U.S. companies poised to benefit from the growing global middle class include personal-care-product names like Proctor & Gamble (PG) , Church & Dwight (CHD) and Clorox (CLX) , as well as food companies like Tyson Foods (TSN) and Pilgrim's Pride (PPC) .
There will also be U.S. investors that "go local" by investing in companies based in emerging markets themselves -- but while that sounds great in theory, there are a variety of issues to consider. These can range from different overseas accounting and financial-statement standards to time differences between U.S. and overseas stock markets.
To me, a simpler way to get widespread exposure to emerging markets is through the use of exchange-traded funds. Let's check out three that I like, listed in order of assets under management:
Vanguard FTSE Emerging Markets ETF (VWO)
This fund -- the largest emerging-markets ETF in market-cap terms - offers exposure to such countries as Brazil, China, South Africa and Taiwan.
Its $60.5 billion in assets, its liquidity-friendly average daily trading volume of about 15 million shares and its very affordable 0.14% expense ratio make it a go-to choice for investors seeking emerging-market exposure.
What I personally like about the fund is that it primarily focuses on Asia and counts Tencent (TCEHY) , Alibaba Group (BABA) , Taiwan Semiconductor (TSM) and Baidu (BIDU) among its top holdings.
iShares MSCI Emerging Markets ETF (EEM)
This is the No. 2 emerging-markets in assets under management, with about a $31 billion market cap.
It also beats VWO in terms of average daily trading volume, with 79 million changing hands per session on average. That superior liquidity reflects the nature of EEM's holdings. Large-cap stocks account for more than 85% of its assets. with a big emphasis on technology and financials.
Another difference between EEM and VMO shares is their geographic breakdowns. While VMO's top three markets are China, Taiwan and India, EEM's are China, South Korea and Taiwan.
EEM also pays a $1.18-per-share annual dividend, which translates into roughly a 2.7% yield. That beats the S&P 500's current 1.8% dividend yield.
To me, EEM is the way to go for investors who want larger-cap exposure with a greater emphasis on Asia than what VMO offers.
WisdomTree Emerging Markets Small-Cap Dividend Fund (DGS)
This ETF is the smallest and least-liquid of the three, but offers greater exposure to mid-cap emerging-market equities. It also boasts about a 3.2% dividend yield.
On the downside, that comes with a 0.6% expense ratio. As such, DGS looks like the way to go if you're looking for emerging-market exposure and income, while EEM or VMO seem better for investors who want a combination of growth and liquidity.
