Emerging Markets on the Cheap
By Michael Stratford
Emerging-markets stocks, like their counterparts in the developed world, swooned over the summer because of concerns over slowing global growth and the debt woes of the U.S. and Europe. But the case for putting some of your money in developing nations is unchanged: Emerging economies are likely to grow faster than the U.S. and other established countries for years to come. As for 2011, the International Monetary Fund estimates that gross domestic product in the U.S. will grow by a tepid 2.5%, while it sees GDP in emerging markets climbing 6.6%, on average.
A good way to invest in these exotic locales is to buy Vanguard MSCI Emerging Markets ETF (symbol VWO). The fund aims to follow the MSCI Emerging Markets index, which tracks stocks in 21 developing nations. The index is weighted by market capitalization, so the greater a stock’s value, the more it counts.
One of the fund’s main draws is its annual expense ratio of 0.22%, the lowest of any emerging-markets ETF. By contrast, the yearly fee for iShares MSCI Emerging Markets Index, an ETF that tracks the same benchmark as the Vanguard ETF, is 0.69%.
Note that the ETF doesn’t track its benchmark as closely as, say, a U.S. large-company index fund would. Vanguard says the major reason for the divergence is that, because of time-zone differences, the benchmark relies on “stale prices” while the ETF prices its holdings using “fair values” provided by an outside party.