Benefits of Value Investing
Value investing has become more popular in both developed and emerging markets. A large and growing body of evidence suggests that investing in stocks with below-average price-to-earnings ratios, below-average price-to-book ratios, or high dividend yields provides better long-term returns. Successful investors like Warren Buffett have benefited from this to achieve market-beating returns over time.
Value Investing in Emerging Markets
Emerging markets saw a significant decline during the Great Recession of 2008. Things worsened when the U.S. Federal Reserve announced it would taper its quantitative easing program and raise interest rates. Many emerging currencies experienced a steep drop in value, making the costs of repaying dollar-denominated debts more expensive, which many emerging market governments and companies use to borrow. These debts reached $4 trillion in 2020.
ETFs, Mutual Funds, and Stocks
There are many ways you can invest in emerging markets, including through stocks, ETFs, or mutual funds.
International ETFs are considered the easiest and most cost-efficient way to gain exposure to emerging markets. This is because they provide a complete portfolio within a single security. Additionally, they often have lower expenses than comparable mutual funds. While there are many emerging market ETFs to choose from, only a few focus on value investing. Most of these funds are what are called smart beta funds, which use alternative indexing strategies.
Some of the most popular emerging market value ETFs include:
- FlexShares Morningstar Emerging Markets Factor Tilt (TLTE)
- iShares MSCI Emerging Markets Minimum Volatility (EEMV)
- SPDR S&P Emerging Markets Dividend (EDIV)
- WisdomTree Emerging Markets High Dividend (DEM)
There may be more mutual funds to choose from that focus on emerging market stocks. However, most of these funds are actively managed, as opposed to passive funds. Their expense ratios may also be much more expensive than ETFs. This means you should consider whether the manager’s track record and other factors justify the higher fees.
Finally, investors can buy individual stocks as American Depositary Receipts (ADRs) trading on U.S. exchanges, or as foreign stocks trading on foreign exchanges. Often, the easiest way to find these stocks is to use a stock screening tool like FinViz. Look for foreign stocks trading at discounted multiples or with high dividend yields. The downsides to this approach are that it can be more expensive to build a portfolio, and many of these stocks lack sufficient liquidity.
Conclusion
Emerging markets have long been a target for growth investors, but their recent downturn has also presented an opportunity for value investors. When considering stocks and funds, you may want to look for funds that focus on value or seek out individual stocks. However, remember to take into account the impact of higher costs, liquidity, and other risk factors.
Frequently Asked Questions (FAQs)
What is an emerging market?
There is no definitive definition of emerging markets, but various governments and organizations typically define similar criteria. The U.S. Department of Agriculture describes emerging markets as “countries taking steps toward a market-oriented economy.” Morningstar analysts define emerging markets by comparing per capita gross national income.
Does Vanguard have a value emerging markets fund?
Vanguard has
Vanguard has several funds related to emerging markets, including the Vanguard Emerging Markets Stock Index Fund (VMMSX). This fund employs fundamental analysis, but it does not exclusively invest in value stocks, so it is not a true value fund.
Source: https://www.thebalancemoney.com/value-invest-in-emerging-markets-4125123
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