In recent years, emerging-market exchange-traded funds (ETFs) not only captured the attention of investors, they grabbed them by the collar and demanded that they sit up and take notice.
Countries such as the so-called BRICs (Brazil, Russia, India and China) in particular were among the top performers from 2003 to 2007. Some funds focused on these areas delivered returns of 70 percent or more. But 2008 dawned and delivered a rude awakening as a global slowdown and credit crisis trickled into seemingly every corner of the world.
Many investors and analysts believed these economies were so strong that decoupling was not far off in the future. But recent history has shown that all countries are very much intertwined. The United States depends on these countries for their imports, while they depend on us to buy their goods. Skyrocketing oil prices, tight lending and a shrinking pool of disposable income hit some of these economies right in the solar plexus.
The good news is that although these economies have been hit just as hard as the rest of the world by the market turmoil, investors who missed the boat have a golden opportunity to get in at lower prices. They just need to have a strategy in place. Investors would be unwise to turn their backs on a global region while it’s down and out. Instead, these areas are worth watching, because just like any other depressed area, a turnaround will take place, and you won’t want to miss it.
ETFs have made it easier and more cost effective than ever for investors to gain exposure to the emerging markets, mostly by eliminating the guesswork of stock picking. Although researching large companies is not a daunting task, getting information about a smaller company in India might yield few results. Enter an emerging-market fund, where the legwork not only has been done for you, but you can invest in dozens of companies in one swoop, spreading your risk around.
Also numerous choices exist among ETFs. You can focus on a single country, such as Brazil, or you can just buy one fund that gives you exposure to all four BRICs.
BRAZIL
Brazil’s economy is generally thought to have sound fundamentals that will help it weather this storm better than most other emerging economies. The country also has a rising middle class, a hallmark of any strong economy. Since 2002, the percentage of Brazil’s population defined as middle class has risen from 44 percent to 52 percent.
Brazil has a heavy reliance on commodities, however, meaning that the slowdown that began in July 2008 hit them harder than more diversified economies. On the plus side, Brazil’s government lacks the political volatility present in other BRIC economies.
RUSSIA
Russia has a long history of not “playing nice” with other economies,...