Tuesday, September 14, 2010

Conquering the world with ETFs

 I personally don’t have the confidence to pick stocks from most of the emerging markets. I am well aware that a lot of emerging economies could probably have become more transparent and adopted better policies for foreign investors, but I just don’t feel comfortable investing a significant portion of my net worth in most stocks from developing countries (except maybe the highest quality blue chips).

Thankfully for me, and for anyone else who feels the same way as I do, there is this wonderful thing called an ETF. Exchange traded funds that are based on an index that measure stocks in an emerging market allow us to take part in the growth of emerging economies, while at the same time lowering our risks, as each ETF invests in a number of stocks, providing us with diversification. ETFs can also be more tax-efficient and have lower costs than mutual funds.

While it’s true that investors can potentially realize higher returns by picking stocks rather than buying an ETF. I do, however, believe that emerging market stocks on average will generate pretty good returns, and I would rather enjoy the returns that stocks of a fast growing country generate on average than take a chance that the stock I pick turns out to be a dud.

Here's an article I wrote about valuing ETFs: Valuing ETFs the Benjamin Graham way.I would just like to  say that investors should not only look at a country’s growth rate when investing in an emerging market ETF , but also take into consideration things like inflation, national debt, population growth, natural resources, trade balance, and other things that can threaten the sustainability of that country’s growth, which in turn threatens the returns of stocks in that country.

Emerging markets (I personally like African markets) still have a long way to go, and I would like to take part in their growth sometime in the near future. I think that investing in ETFs is a very good way for me as well as for a lot of people to invest in developing countries.

Thank you for reading, and may you always sustain good returns on your portfolio.