Buy emerging markets for the growth, not the commodities

Tech, finance dominate MSCI index ETFs

Jan 23, 2018 @ 2:54 pm

By John Waggoner

If you're putting clients into emerging-market ETFs to diversify away from the U.S. markets, you should think about whether your emerging-market fund actually does that.

One point to consider: The two largest sectors in the Standard & Poor's 500 stock index are technology and financial services. Those are the two largest sectors in the MSCI Emerging Markets Index as well. In fact, 27% of the index is technology, versus about 21% for the S&P 500.

The FANG stocks (Facebook, Amazon, Netflix and Google) have led technology, contributing about 18% of the S&P 500's gain last year. But the ANTS stocks (Alibaba, Naspers, Tencent and Samsung) have led emerging markets, contributing 43% to the index's gains in 2017, Edward Kerschner, chief portfolio strategist for Columbia Threadneedle Investments, said in an interview at the Inside ETFs conference. The MSCI index, incidentally, has more than 800 holdings.

A common misperception about emerging-market stocks is that they are tightly correlated with natural resources and commodities. But the correlation between emerging-market stocks and the Commodity Research Bureau index of commodity prices peaked at 81% in 2011, Mr. Kerschner said. Today, technology and finance are far more important to emerging markets.

The driving force behind emerging markets, however, is the growth of the middle class in the Far East, particularly China and India. In 2000, only about 4% of the world's middle class was in emerging markets, Mr. Kerschner said, with about 1% each in India and China. But the size of China's middle class is expected to overtake that of the U.S. by 2020, and India will pass the U.S. a year later.

Furthermore, India and China's demographics favor growth. India, for example, has the youngest median age of any major country, at 27. China follows at 37, while the U.S. median is 38 and Europe is 43.

"This is the U.S. postwar baby boom on steroids," Mr. Kerschner said.

(More: How to invest in frontier markets)


What do you think?

View comments

Most watched


Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.


Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

Latest news & opinion

New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension

Industry push results in chance to air grievances on July 17 and another month to present objections.

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

Galvin to propose fiduciary rule for Massachusetts brokers

The secretary of the commonwealth is proposing a fiduciary standard in response to an SEC investment-advice rule he views as too weak.

Summer reading recommendations from financial advisers

Here are some books that will keep you informed and entertained during summer's downtime

4 strategies for Roth conversions

There's never been a better time to do a Roth conversion, and here are several ways to go about it.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print