Emerging Market Stocks Are Shockingly Underweighted

| January 18, 2011 | 0 Comments

If you’re like most investors, you probably invest primarily in US stocks, mutual funds, and ETFs.

Most investors tend to stick with what they know.  And investing in America was great for your parents and grandparents.  But in order to be successful today, you need to invest in the world.

Simply put, the greatest growth opportunities are now found outside of the US.

But what I discovered about investing in emerging markets was shocking!

According to Morningstar, at the beginning of last year, only about 2% of mutual fund and ETF assets are in emerging market equities.

And that’s not all, according to the International Monetary Fund, emerging-market stocks have grown as a portion of total US holdings from 1.63% in 2004 to 2.41% in 2009.  But during the same time, emerging-market stocks grew from 8.7% to 15.9% of total world market capitalization.

So while investors slowly inched up their emerging markets investments, the area was exploding!

Here’s the bottom line…

The average American investor is severely underweight emerging markets.

Even conservative estimates indicate investors should have at least 5% of their portfolio in emerging market stocks.  But I believe you should have 10% to 15% of a portfolio in emerging markets.

Any way you slice it, investors have a long way to go before emerging markets are adequately represented in their portfolios.

With so many people pounding the table about emerging markets, why haven’t investors been quicker to act?

It all comes down to risk… or at least the perception of risk.

Emerging markets have been labeled as riskier than developed markets.  But over the last few years, that’s all changing.  Emerging markets have demonstrated they can be much less risky than most people believe.

The truth is many emerging economies have better economic fundamentals than developed economies.

Just look at the facts…

The consumers, corporations, and governments in emerging markets typically have lower debt levels.  And they’re not dealing with the hangover from the housing bubble.

And to top it off, emerging markets have become much more stable politically and socially.  And corporate governance has become much stricter.

Yet their economies are still growing faster!

So I’m left wondering… What exactly makes emerging markets riskier?

It seems like many of the old risks making emerging markets “risky” have been diminished if not eliminated altogether.  Yet they still have the incredible upside potential for earnings growth!

The tides are starting to shift…

Over the last few months, the pace of investment in emerging markets has picked up steam.  Some are speculating it’s tied to the flood of liquidity from the US and Europe.

And it’s true, to a certain extent.  The Fed’s latest round of quantitative easing has spurred investment in stocks in developed and emerging markets alike.  But by no means has it brought the level of investment in emerging markets up to anywhere near where it should be.

In fact, I think the increased investment in emerging markets is just getting warmed up.

Remember, investors are still woefully underweight emerging market stocks.  If they’re following any type of disciplined strategy, they’ll need to continue buying emerging market stocks for years to come.

What does that mean for you?

You need to have exposure to emerging market stocks in your portfolio. Their wealth building potential is simply too big to ignore.

An easy way to get started is with ETFs.  The iShares MSCI Emerging Markets Index Fund (EEM) is a great option.  With this one ETF alone, you can buy into all of the hottest emerging markets.

It holds stocks from China, India, Brazil, South Korea, Taiwan, Russia, and many more…

Now more than ever, investors need to be investing in emerging markets. It has the makings of a secular bull market that could last for decades.

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Category: ETFs

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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