VWO - emerging markets fund

[sol]

I've been slowly moving my investments towards a more global asset allocation over the past year or so, with a slight focus on emerging markets because I think that in the very long term (multiple decades) they will outperform the US or European markets.

VWO is a relatively low-expense Vanguard ETF with no minimums, and it's down about 5% over the past week.  It's a volatile fund but I think it was attractively priced a week ago and a deal today.  Yes, I'm market timing.  Just a little, quietly and when no one is looking.

This seems like a very volatile fund.  Most years of the past decade it's up or down ~20%, so not exactly ideal for someone who expects to need that money in the short term.

Does anyone else here invest in VWO?  What purpose does it fulfill in your investment strategy?  Are there better alternatives for emerging market exposure?

[foobar]

I've been slowly moving my investments towards a more global asset allocation over the past year or so, with a slight focus on emerging markets because I think that in the very long term (multiple decades) they will outperform the US or European markets.

VWO is a relatively low-expense Vanguard ETF with no minimums, and it's down about 5% over the past week.  It's a volatile fund but I think it was attractively priced a week ago and a deal today.  Yes, I'm market timing.  Just a little, quietly and when no one is looking.

This seems like a very volatile fund.  Most years of the past decade it's up or down ~20%, so not exactly ideal for someone who expects to need that money in the short term.

Does anyone else here invest in VWO?  What purpose does it fulfill in your investment strategy?  Are there better alternatives for emerging market exposure?

EM is super volatile. In the past you have been rewarded for that (see the returns of 1980-1989 or 2002-2007) but along the way the downsides  can get nasty. In general when the US tanks, EM also tanks (see 2000-2002, 2008, 73-74) and you pick up a couple more crash (96-98) due to EM defaults and risk. In between you make a killing.

The big difference in most EM funds is if they include south korea and Taiwan. Some of the fundamental indexes try and spread out the money a bit more so you don't have quite as much in china. But I can't really argue that picking anything other than VWO is a  better choice.

[NP]

I think VWO is a safe choice if what you want is passive indexing of emerging markets. Yes, it's very volatile but that's what you get in emerging markets. Perhaps there are a few slightly better ETFs but I doubt there's anything that's significantly better.

I use VWO for custom asset allocation. Most funds and ETFs that target non-US markets invest very little in emerging markets (VXUS and VEU both have about 15%, for example), and I prefer to have a bigger slice. I also own some EWX to fine tune my portfolio and increase the allocation to mid and small cap stocks in emerging markets (VWO has only about 12% mid and small cap combined).

Disclaimer: I'm not aware of any consensus opinion on what's the optimal allocation to emerging markets, except that it should be greater than zero. Increasing the allocation compared to well-established funds like the Vanguard Total International Stock Index may or may not be a good idea. It's just my personal opinion that it is if you're investing for the long-term.

The most commonly accepted advice for buy and hold investors (it seems that's what you want to do with your emerging markets investments) is not to delay your purchase hoping for better market conditions. Since your attempt at market timing suggests the same (buy now), you might as well go with it. (I cannot comment on whether you'd be better off waiting, and I don't think anyone can. Statistically you tend to be better off not waiting.)

[backpacker]

Everyone should hold some emerging markets in moderation. The very thing that makes emerging markets scary to many investors (its volatility) is actually a feature for investors in the savings stage. More volatility means more opportunities to buy shares when they are priced below the mean. Also, EM is less correlated with us stocks than developed international. So while it has lots of volatility on its own, its volatility gets tamped down when its added to a portfolio that already has large investments in domestic stocks.

[samuck]

I tilted my portfolio also towards EM because I agree this is where future growth is. Use Vanguard EM as well, seems a very solid choice! Also, I went for a SPDR EM dividend etf (https://www.spdrs.com/product/fund.seam?ticker=EDIV) but I stopped buying and focus solely on VWO because I'm more interested in growth than (dividend) income at this stage... Both The SPDR and the Vanuard EM etf have performed very well this year - till now at least, but I'm certainly not selling.

[johnintaiwan]

I own VWO. EM is very volatile, but if you are looking for exposure to EM it looked like the best deal as far as expenses and such. I have a ways to go as far as savings is concerned so I am not worried so much about the volatility.

[sb_NoVA]

ODMAX has done exceedingly well over long periods of time.  The fund is now closed though for new investors.

[beaster]

I have invested in eem and vwo (after etfs became available; prior to that i had those funds in index mutual funds) in past but have reallocated that portion of my portfolio to ECON an FM for the long term. If you have not done so already, do your due diligence on what actually makes up the msci emerging markets index. I don't really consider South Korea and Canada "emerging" ;)

[Roland of Gilead]

I bought VWO fairly heavy last year when it dipped into the $37 $38 range.  I just stuck it in my portfolio and forgot about it.

[Ohio Teacher]

I also bought some VWO a while back when its price seemed depressed (market timing) and then sold it for a decent gain when I decided to stop tilting.  Now my international exposure is strictly in VTIAX, where the % of emerging markets is the true % of the total world market ex-US (18.9% as of right now). 

[milesdividendmd]

VWO is an excellent emerging markets index fund and my personal favorite.

This well researched article argues that IEMG is the best EM fund because of its combination of low cost and small cap exposure:

http://www.etf.com/sections/blog/23164-robots-leave-money-on-the-table.html

Incidentally if market timing appeals to you at all, now is an excellent time to buy into emerging markets as they are relatively cheap by valuation  metrics and have extraordinary momentum over the last 6 to 8 months.

[Left]

Since I don't know anything about emerging markets, does anyone know how countries are classified as "emerging" and when they switch to "developed"? I mean if X country in the fund does well over 2-3 decades, does it drop from the fund and become part of a developed market fund? At this point, does the fund lose all the gains of it since it left the fund group?

[Kmp2]

I hold VWO as my EM exposure, 5% of my portfolio. Every time I rebalance, I either sell some of it because it's high, or plow more money into it because it's low. (Natural market timing - about once a year). Haven't really looked at any other EM index fund, this one was broad enough, and had a low enough fee for me, and didn't overlap any of my other funds too much.

[milesdividendmd]

Since I don't know anything about emerging markets, does anyone know how countries are classified as "emerging" and when they switch to "developed"? I mean if X country in the fund does well over 2-3 decades, does it drop from the fund and become part of a developed market fund? At this point, does the fund lose all the gains of it since it left the fund group?

Emerging markets are a loose category of economies defined most often by a per capita income in the low to intermediate range.

These economies are considered "emerging" because they are transitioning from closed to open capitalist market structures and as such have both more risk in terms of economic shocks and more reward in terms of future GDP growth.

Different indexes define EM differently so countries like south Korea will be included in some EM indices, and not in others.

Countries can absolutely move up from EM to developed market status, and down to frontier markets depending on economic indicators.

[Left]

@miles, but what happens to the fund when a country becomes large enough/developed to move out of the category? I just haven't found anything on google that says how this impacts a fund if there is any

[milesdividendmd]

@miles, but what happens to the fund when a country becomes large enough/developed to move out of the category? I just haven't found anything on google that says how this impacts a fund if there is any

Eyem,

I don't know specifically, but my guess is that it's the same thing that happens to any noncapital weighted total market fund when its index changes.

For instance what happens to a small-cap fund when a company graduates into the mid-cap range? Or what happens to a value fund when a company transitions from a low book to market value to a high book to market value?

My guess is that the index fund must sell the assets (or Equity from the country in question) which has graduated from the fund and reinvest the proceeds in assets that are still included in the fund.

This is why total market cap Weighted indexes are always the cheapest funds. Fund managers never has to buy or sell assets when the composition of the index changes.

[juuustin]

I just checked on the dividends of a selection of Vanguard ETFs.  VWO announced .4460 per share this week for an annual yield of 4.21%.  While that obviously cannot protect you from all of the volatility (like yesterday's 2%+ drop), it is a pretty healthy amount for an ETF.

[acroy]

Tough call man - I have owned VWO in the past.

However, S&P 500 companies get like 40-50%+ of their business from EM! and the country, government etc of the US of A is much less volatile/risky.

So a straight-up S&P index fund largely captures EM growth anyway - as best as the management of the biggest, best companies in the biggest, most efficient economy in the world can do it.

tough call :)

[NorCal]

EM's are good to have in moderation.  I also personally keep an allocation to individual Frontier Markets (or those somewhere on the border between Frontier & Emerging), with a small amount spread over a lot of countries.  Think Peru, Indonesia, Philippines, Vietnam, Turkey, etc.  The overall portfolio should do very well over a long period.

[aschmidt2930]

Tough call man - I have owned VWO in the past.

However, S&P 500 companies get like 40-50%+ of their business from EM! and the country, government etc of the US of A is much less volatile/risky.

So a straight-up S&P index fund largely captures EM growth anyway - as best as the management of the biggest, best companies in the biggest, most efficient economy in the world can do it.

tough call :)

Completely agree, there's solid arguments on both sides of this one.  On one hand, major US companies such as GE have most of their revenue coming from overseas anyways, so therefore they stand to benefit more from international growth than US growth. 

On the other hand.. At current prices you can get more company for your money by investing in EM funds.  I think the answer here is both! 

[samuck]

However, S&P 500 companies get like 40-50%+ of their business from EM! and the country, government etc of the US of A is much less volatile/risky.

I don't think this is correct - by investing in US companies you have in fact exposure to international markets in the range you mention, but including developed markets outside US, not only emerging markets.

[sol]

VWO volatility strikes again, it's down under 40 for the first time in months. Goes to show how terrible I am as a fund picker, since I started this thread while buying it at 44.

I'm still buying though, as I prefer to think of the dip as a buying opportunity rather than a 10% loss.  Foolhardy?

[milesdividendmd]

VWO volatility strikes again, it's down under 40 for the first time in months. Goes to show how terrible I am as a fund picker, since I started this thread while buying it at 44.

I'm still buying though, as I prefer to think of the dip as a buying opportunity rather than a 10% loss.  Foolhardy?

Not foolhardy, at all.  It's a good time to build up to your desired position in EM. 

But no harm in harvesting a tax loss if its held in a taxable account!  Free money doesn't suck.

AZ

[Numbers Man]

I owned VWO for several years from around 2006-2010. I bought in the mid to late 30 dollar a share area and saw it go up to nearly $60/share then plunging during the financial crisis we had and sold at about $40. I see it's around $40 a share 4 years later. I bought VWO to have an Emerging Market presence (10% of my portfolio) but later came to realize that the Emerging Market category was some bullshit made up diversification category since those markets never seem to emerge and grow.

[milesdividendmd]

I owned VWO for several years from around 2006-2010. I bought in the mid to late 30 dollar a share area and saw it go up to nearly $60/share then plunging during the financial crisis we had and sold at about $40. I see it's around $40 a share 4 years later. I bought VWO to have an Emerging Market presence (10% of my portfolio) but later came to realize that the Emerging Market category was some bullshit made up diversification category since those markets never seem to emerge and grow.

That's a pretty simplistic (and backwards) way of looking at it.

For one you are ignoring all the dividends you received over all the years of owning VWO

For 2 you are ignoring the diversification benefit which increases the amount of money you take home from your entire portfolio.

For three if you started investing in the US stock market in 2000, and stopped in 2010, would've reached a very similar conclusion, that US stocks were "bullshit that never seem to emerge."

Here is a nice piece by Cliff Asness, on the folly of judging assets over short time periods.

https://www.aqr.com/cliffs-perspective/efficient-frontier-theory-for-the-long-run

[Honest Abe]

I have VWO and IEMG in my Betterment portfolio.. It just harvested a $200 loss for me by selling IEMG and trading back into VWO. VWO is very volatile so it tend to capture losses there often I find. Either way, I'll gladly take the $50 back on my taxes this year :-P

[ScroogeMcDutch]

I have EM as part of my asset allocation using a mutual fund which in turn uses VWO, mostly for one reason and that is that I didn't feel comfortable with just having money in developed countries. My AA now covers the modern economies, with a slight tilt towards Europe as that is where I live.

I can't tell exactly whether EM will outperform the market, or if EU will, of is US will in the coming time. I see better potential in EM and in EU than in US, especially considering the growth US just has had. The potential is dependent on political developments though, and banking on that is just as risky as going to a casino :)

The other reason I have the VWO-related mutual fund is tax-loss harvesting which is more likely with the more volatile funds.

[Beardog]

From ScroogeMcDutch:

I can't tell exactly whether EM will outperform the market, or if EU will, of is US will in the coming time. I see better potential in EM and in EU than in US, especially considering the growth US just has had. The potential is dependent on political developments though, and banking on that is just as risky as going to a casino :)

+ 1 (underlines, mine)

For this reason, about half of my stock exposure is international, including a small amount in an emerging markets index fund.

[sublime9528]

The point of owning VWO (or any other risky asset for that matter) is that over the long run, there is the possibility for greater return for that greater risk.  I invest in VWO as a part of my slice-n-dice portfolio, but I'm thinking about returns 20+ years from now, not within the range of just a few years.  The volatility can also be a benefit because VWO often moves in directions different from the S&P, and so you can have good opportunities to rebalance by buying low and selling high if you so desire.  So you get higher potential reward for higher risk, and diversification benefits. 

And there's always tax loss harvesting. 

[El Limon]

I used to range trade the VWO between 37 and 40 with my "fun money". I'll chalk it up to luck that it never really broke the support level. Feels different this time though...tempting nonetheless.

Personally I don't think it's wise to go heavy into long-term Emerging Markets unless the fund is de-BRIC'd. Too much crazy muslim stuff and political instability around those regions. I'd be interested in a non-Islamic, non-communist, non-Russian emerging markets fund; functional democracies only.