where to invest 10,000 (bloomberg business week)

Where to Invest $10,000 Right Now

Five experts weigh in. 

Emerging markets are still favorites,

 but Europe is also on the list.

By Suzanne Woolley

June 20, 2016 | Updated on October 17, 2016

Successful investors take risks. The trick is to take smart ones, in a diversified portfolio.

Here’s how.

First, make sure you’re covered on the financial basics. Then start scouting out powerful places to invest any excess cash that's making you next to nothing in a savings account. With the holidays and perhaps a raise or bonus on the horizon, it’s a good time to make that money work for you and your retirement.

To help, we asked five leading investors to share their best ideas on where to invest $10,000 right now. (It makes sense for smaller sums, too.) We first quizzed them back in June, when we also asked exchange-traded-fund analyst Eric Balchunas of Bloomberg Intelligence to choose ETFs that came closest to the strategies and themes they highlighted. Some of the experts also run mutual funds that employ their strategies.

Among their summer favorites were out-of-favor emerging markets, and many ETFs tracking those markets have seen double-digit gains. How did our panel of experts do last quarter, exactly? Very well, thank you. Check out the results that follow each new entry below. For comparison, the Standard & Poor’s 500-stock index was up 3.3 percent from June 30 to Sept. 30.

So is it too late to get into emerging markets now? Is China still promising or just too messy? We’ll let the panel answer, and share its new ideas, ranging from opportunities in floating-rate bank loans to consumer-related stocks in China.

You can toggle between last quarter’s and this quarter’s advice with a quick click, or just check out the panel’s advice for the here and now.

 Either way, as we emphasized in June’s “Where to Invest $10,000 Right Now” and above, take a look at these financial musts first.

Then see if you can profit from our experts’ latest ideas.

Barry Ritholtz

Chairman and chief investment officer, Ritholtz Wealth Management

• Now
 
• Q3

Stick With ‘Ugly Ducklings’

Three months ago, we looked at where to invest $10,000. My suggestion, assuming your portfolio was already well diversified in low-cost global indices, was to look at inexpensive, underperforming asset classes that were “ripe for a reversion towards their historic average returns.” I suggested two emerging market indices, with the caveat that “ugly duckling investments” like these often need years to blossom.

I was way too pessimistic, as these two funds have rallied about 12 percent since then.

Rather than cash out, I am going to suggest you stay with this investment for longer. Not just a little longer, but a whole lot longer.

Why? There are at least four compelling reasons:

First, and most obvious, emerging markets remain the cheapest broad equity markets in the world. The U.S. is fully valued; the developed world ex-U.S. is also pricey. Europe, despite all of its woes, isn’t much cheaper. EM, on the other hand, remains attractively priced. If you want to see how well this thesis is playing out, look at a chart of the ratio between the S&P 500 index (SPY) versus the MSCI Emerging Markets Index (EEM). When the line is rising, U.S. markets are outperforming emerging markets; when it is falling, EM is outperforming U.S.

Second, as we noted last time, the U.S. has been outperforming EM for about seven years. These cycles can run anywhere from five to 10 years, and given the valuation differential we could be in the very early innings of a long bull market for emerging economies.

Third, emerging markets are affected by the strength of the U.S. dollar and pricing of commodities. Today, the dollar is at multi-year highs while commodities are the cheapest they've been in many years. I have no idea how long this condition will persist, but eventually mean reversion will rear its head. The dollar will weaken, commodities will see price increases, and both of those benefit the EM economies and their stock markets.

The same two inexpensive investments—DFA Emerging Markets Core Equity (DFCEX, purchased through advisers) and the Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX)—remain my choices. [DFCEX rose 7.4 percent for the three months ended Sept. 30; VEMAX gained 6.5 percent.]

Fourth and last is a trading rule I developed a long time ago: So long as the underlying reasons for owning something are still in place, you hold on to that position. Never make excuses for not selling once your thesis is disproved. Conversely, until your underlying reasons for ownership are no longer valid, don’t sell merely because of a little price appreciation. Cutting your losers and letting your winners run is much better investing strategy.

Way to play it with ETFs: The Vanguard FTSE Emerging Markets ETF (VWO)  holds 36,000 emerging-market stocks, with its heaviest weightings in China, Taiwan, and India. VWO is the ETF version of Vanguard Emerging Markets Stock Index Fund (VEMAX) and costs the same. Either will do.

Performance of last quarter’s ETF plays: The ETFs Balchunas chose to track Ritholtz’s advice were the iShares Core MSCI Emerging Markets ETF (IEMG)  and theiShares Edge MSCI Minimum Volatility Emerging Markets ETF (EEMV) . They rose 9 percent and 5 percent, respectively, for the three months ended Sept. 30.

Sarah Ketterer

CEO and fund manager, Causeway Capital Management

• Now
 
• Q3

Invest in Corporate ‘Self-Help’

In this seemingly endless environment of economic stagnation, what will drive revenue and profit growth? Central banks may be running out of monetary solutions to stimulate credit and demand. While we wait for the political landscape to become less muddled, investors can get access to companies engaged in operational restructuring or “self-help.”

These companies, boasting strong balance sheets and modest levels of debt, typically have managements committed to a continuous and inexorable process of cost cutting and increased efficiency. In mobile telephony, especially in Japan, China, and South Korea, several of the largest listed companies have found increasingly ingenious ways to extract above-industry-average returns from the mature telecommunications market. [China Mobile Ltd. and SK Telecom Co. Ltd. were in the top 15 holdings of the Causeway International Value Fund (CIVIX), as of June 30.] Smart self-help moves by senior managements of these companies have led to a reduction in capital expenditures and operating costs.

These companies are typically creating innovative and value-added services, introducing popular data plans and benefiting from supportive local regulations. Similarly, in the more mature segment of technology, “legacy tech” companies also have managements committed to reinvigorating growth. Even though these companies have valuable proprietary technology, sell-side analysts put some of them in the dinosaur category. But the analysts often take a short-term view. Market pessimism can give investors a chance to buy world-class technology franchises in transition.

For example, large enterprise software companies must make a successful transition from an on-premises licensing business model to a cloud-computing subscription-based model. Semiconductor companies currently expert in mobile wireless technology are making measurable progress to deliver next-generation technology. Look for efficient operations, focused and shareholder-friendly managements, as well as inherent advantages in research and development expertise and resulting defendable intellectual property. [SAP and Samsung Electronics are CIVIX holdings.]

Economic malaise aside, these great companies, albeit often labeled mature and in transition, still trade at valuations that imply the potential for above-market returns.

Way to play it with ETFs: The First Trust NASDAQ Technology Dividend Index Fund (TDIV)  holds tech companies that pay the highest dividend, which means it has the largest percentage of “legacy tech” names such as Intel Corp., Microsoft Corp., Cisco Systems Inc., and Oracle Corp. This “I love the 90s” portfolio has the lowest volatility, lowest average price-to-earnings ratio, and highest dividend yield of the technology ETFs.

Performance of last quarter’s ETF plays: The ETF Balchunas chose to track Ketterer's advice back in June was The WisdomTree Japan Hedged Equity Fund (DXJ) . It rose 11 percent for the three months ended Sept. 30.

Mark Mobius

Executive chairman, Templeton Emerging Markets Group

• Now
 
• Q3

Look to China’s Internet

We believe emerging markets should be included in a well-diversified portfolio, and one place to invest $10,000 of that portfolio is in China. Since the beginning of 2016, we've observed the Chinese stock market acting with high volatility. That's due in large part to changes in government policies as regards supporting or heating up [the market] but then cooling the market down. This, of course, has created a lot of speculation and confusion. However, what we are certain of is that the fundamentals in China still remain positive.

Despite a decelerated growth rate, China remains one of the fastest-growing economies in the world. We are not too concerned by the current slowing growth nor its long-term investment prospects. Looking past the Chinese stock markets, we are now on the ground and looking to capitalize on the long-term Chinese growth story and the ongoing transformation of its economy from a production/export-led economy to a services-led economy.

Emerging markets globally in many cases have been severely oversold and are cheap in relation to their long-term earnings capacity. This is true in China as well as other countries. We are probably nearing the end of the downtrend in prices, so our focus must be company-specific rather than making a commitment to the market in general. We are most bullish for consumer-related stocks and particularly technology stocks.

More specifically, Internet stocks are showing healthy growth characteristics with good margins. Selected commodity shares are still cheap and are among our favorites, but I emphasize “selected,” since not all the sector stocks are of interest. Oil prices have shown a bottoming out, and with the expectation that those oil prices will not have a dramatic upside, diversified oil companies should do well because of their downstream operations. [Downstream refers to refining and other activity that leads to selling to consumers at gas stations, rather than activities like production and exploration.]

Ways to play it with ETFs: The iShares MSCI China ETF (MCHI)  is a highly liquid, fast-growing China ETF that tracks Hong Kong- and U.S.-listed Chinese companies. It has a 34 percent weighting in tech stocks such as Alibaba Group Holding Ltd. and Tencent Holdings Ltd. and a 10 percent allocation to consumer stocks. Investors could pair MCHI with the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) . It holds locally traded A-shares, albeit with only 8 percent in the tech sector but with 16 percent in consumer stocks.

Performance of last quarter’s ETF plays: In the first iteration of "Where to Invest $10,000 Right Now," the two ETF analyst Balchunas chose to track Mobius's advice were the iShares MSCI China ETF (MCHI)  and the iShares MSCI Brazil Capped ETF (EWZ) . The ETFs were up 14 percent and 11 percent, respectively, for the three months ended Sept. 30.

Rob Arnott

Co-founder, Research Affiliates

• Now
 
• Q3

Add Out-of-Favor Europe

My recommendation in June was to concentrate on emerging-market value stocks. Over the three months ending in August, the Fundamental Index in emerging markets rallied by 17 percent, conventional emerging markets stocks were up 12 percent, and U.S. stocks were up about 4 percent. [Fundamental indexation is a way to weight the stocks that make up an index by fundamental factors of their business, such as sales, book value, and cash flow, rather than their market capitalization. This leads to a tilt toward value, rather than, say, the growth tilt of the market cap-weighted S&P 500 Index.]

Will the rally in EM stocks continue? We have no idea. Valuation levels suggest that the long-term prospects remain excellent. Even after the run-up, EM stocks are trading at about 13 times their long-term (10-year) earnings, compared to European stocks at 14 times and U.S. stocks at a nosebleed level of 27 times. The Fundamental Index in emerging markets is even cheaper, at around 8½ times earnings.

Looking through the lens of valuation, it now makes sense to consider adding European stocks to the mix. Note that both EM and Europe are severely out of favor. That’s normal for bargains. We win, on average over time, by buying whatever others shun.

The same value principle applies to other asset classes. Some out-of-mainstream bond markets have pushed into bargain territory after a three-year bear market. The best time to pivot into an asset class is when it is most shunned. With near-zero yields on mainstream bonds, we can seek higher yield in other bond markets. Floating-rate bank loans are attractive for their higher yield and their ability to weather any backup in bond yields. Emerging-market local currency bonds are also interesting based on strong fundamentals and the tailwind from cheap currencies. And EM local currencies offer ample opportunity, having tumbled from a 25 percent premium five years ago to a 19 percent discount today!

Today I would invest $10,000 by placing $2,500 in each of these four asset classes: EM deep value stocks, European stocks (preferably with a value bias), floating-rate bank loans, and EM local currency bonds. This is not a “permanent portfolio,” but it’s a nicely diversified (if unconventional) portfolio of reasonably cheap markets.

Ways to play it with ETFs: An ETF to consider is PowerShares Fundamental Emerging Markets (PXH) , which has fees of 0.49 percent. (It uses Arnott's fundamental indexing approach.) For Europe there's the Vanguard FTSE Europe ETF (VGK) , for floating-rate bank loans there's the PowerShares Senior Loan Portfolio (BKLN), and for EM local currency bonds investors can use the VanEck Vectors J.P Morgan EM Local Currency Bond ETF (EMLC).

Performance of last quarter's ETF plays: To track Arnott's advice in the last go-around, ETF analyst Balchunas chose the First Trust Emerging Markets AlphaDEX Fund (FEM) , which uses growth and value factors to select stocks. It gained 8 percent for the three months ended Sept. 30. An ETF mentioned above, PXH, which also would have been a good way to play Arnott's advice, rose 11 percent. A mutual fund, the Schwab Fundamental Emerging Markets Fund (FNDE), uses Arnott's approach as well.

Francis Kinniry

Principal, Vanguard Investment Strategy Group

• Now
 
• Q3

Add to Your Losers

If the original investment plan you established still meets your long-term goals and objectives, new proceeds of $10,000 can be allocated to return your portfolio to its original asset allocation. As such, the new cash flow would be seen as a "non-taxable rebalancing" opportunity. In other words, you can better align your portfolio back to the investment plan without selling better-performing assets—and thus realizing a taxable gain—to buy more of what hasn’t done well in the portfolio.

Why would anyone want to do this? Because a portfolio’s asset allocation is the major determinant of its risk-and-return characteristics. Yet, over time, asset classes produce different returns, so the portfolio’s asset allocation changes. Therefore, to recapture the portfolio’s original risk-and-return characteristics, the portfolio should be rebalanced. Portfolio rebalancing is extremely important, because it helps investors to maintain their target asset allocation. By periodically rebalancing, investors can diminish the tendency for “portfolio drift” and thus potentially reduce their exposure to risk relative to their target asset allocation.

Ways to play it with ETFs: While there isn’t one ETF for Kinniry’s suggestion, it’s a good excuse to point out that investors can now get a fully diversified portfolio with ETFs for a blended fee of around 0.10 percent using funds offered by Vanguard Group, Charles Schwab Corp., and BlackRock Inc., which just lowered fees on its “core” series aimed at individual, buy-and-hold investors.

Performance of last quarter’s ETF plays: Kinniry’s June commentary focused on low-cost target-date funds, and there is no real way to replicate all the parts of a target-date fund with an ETF. Balchunas focused instead on an asset allocation ETF, theiShares Core Growth Allocation ETF (AOR) . It has 60 percent in equity ETFs and 40 percent in bond ETFs. It rose 3 percent for the three months ended Sept. 30.

How much can you make in stocks? Realistic Expectations (ICMA Retirement Corporation)

Charts of the Week

Capital Markets Review (As of 9/30/2015)

Chart of the Week for October 2, 2015 - October 8, 2015

Capital market returns were generally negative in the third quarter of 2015, with the exception of U.S. Bonds which had slightly positive returns as U.S interest rates fell during the quarter. Over the trailing 1-year period, U.S. Bonds and U.S. Small-Cap Stocks provided positive returns while International Developed Market Stocks, Emerging Market Stocks, U.S Large-Cap Stocks, and U.S. High Yield Bonds all had negative returns. Over the trailing 5-year period, all asset classes shown except Emerging Market Stocks had positive returns, with U.S. Large- and Small-Cap Stocks outperforming the other asset classes shown.

While U.S. economic reports were generally positive for the third quarter, the negative returns for the asset classes shown above can be related to several factors including market volatility, concerns over economic conditions in China, and U.S. interest rate policy. Emerging Market Stocks was the worst performer in U.S. dollar terms, losing 17.90%. U.S. Small-Cap Stocks lost 11.92%, International Developed Market Stocks lost 10.23%, U.S. Large-Cap Stocks lost 6.44%, and U.S. High Yield Bonds lost 4.86%. U.S. Bonds was the only asset class with positive returns noted on the chart for the quarter, wtih a return of 1.23%.

In the chart above:

• U.S. Bonds are represented by the Barclays U.S. Aggregate Bond Index.
• U.S. High Yield Bonds are represented by the Barclays U.S. Corporate High Yield Index.
• U.S. Large-Cap Stocks are represented by the S&P 500 Index.
• U.S. Small-Cap Stocks are represented by the Russell 2000 Index.
• International Developed Market Stocks are represented by the MSCI EAFE (Net) Index.
• Emerging Market Stocks are represented by the MSCI Emerging Markets (Net) Index.

the best ETFs (Investor Place)

The 7 Best Index Funds for Your Money

by Kyle Woodley | June 10, 2014 11:00 am
Wall Street’s “smart money” has really been making a case for some of the market’s best index funds.
[1]Months ago, Warren Buffett drew headlines for saying the money he plans to leave behind for his wife should be mostly sunk into a low-cost S&P 500 index fund. (For the record, he prefers Vanguard’s offerings, which likely means the VOO ETF.) More recently, Charles Schwab’s (SCHW[2]) namesake founder said that index funds were right for 98% of Americans. (You’ll be surprised to find that Chuck gave a mention to Schwab’s “1000 Index.”)
And it’s pretty hard to argue with them.
After all, index funds can offer portfolio stability in a pinch, meaning even the most novice investor can do right just by stocking up on a few of the best index funds the market has to offer. Whether it’s an index-tracking mutual fund in your 401k, or a few ETFs in your IRA, you can throw together hundreds of stocks, some commodities, bonds — you name it! — into your retirement plan without breaking a sweat or dropping thousands of dollars in trading fees.
Which funds to buy ultimately is up to you — your investment horizons, your risk tolerance. But if you’re looking for a place to start, consider this list of seven of the best index funds that will tackle most of the globe, and will position you in both growth and income.

Best Index Funds – Vanguard S&P 500 ETF (VOO)

[4]Index: S&P 500 (American large-cap index)
Expenses: 0.05%
The brightest minds on Wall Street have a nagging problem – they can’t beat the market. Hedge funds have been underperforming the S&P 500 for years on end. More often than not, mutual funds can’t get over the hump, either.
Sounds like the market is a pretty formidable investment, then, huh?
It is. Including dividends, the S&P 500 has returned 9.45% annually over the past 20 years – an amount that puts the vast majority of fixed income to shame.
What’s great is that investing in the S&P 500 couldn’t be easier — or cheaper. The SPDR S&P 500 ETF (SPY[5]), iShares Core S&P 500 ETF (IVV[6]) and Vanguard S&P 500 ETF (VOO[7]) all allow you to “track” the S&P 500 — that means positions in Apple (AAPL[8]), Exxon Mobil (XOM[9]) and the rest of the gang. You not only get access to the capital gains of the group, but also just less than 2% in dividends at current prices.
And all three funds provide this for less than a dollar for every $1,000 invested.
So why the VOO over the IVV and SPY ETFs? More principle than anything else. Investing in an S&P 500 is truly one of the cheapest ways to diversify your holdings in a hurry. So if all else is equal (which it is — all three funds all simply track the S&P 500), why not go with the one with the lowest total expenses?
And at 0.05%, VOO takes the pricing gold.
Read more about the VOO here.

Best Index Funds – iShares Core S&P Small-Cap ETF (IJR)

[11]Index: S&P Small Cap 600 (American small-cap index)
Expenses: 0.17%
The S&P 500 is great because it’s a host of large-cap stocks that offer some stability, some dividends and decent growth. That’s why you’ll want to add small-cap stocks to supercharge your growth.
Small-cap stocks are naturally riskier than their larger counterparts. Many of them are newer businesses that aren’t necessarily as battle-tested as the blue chips. Adding to the risk is the fact that their financial resources are simply smaller — debt’s harder to come by, and cash usually is spent growing the business rather than sitting in a vault for a rainy day.
On the flip side, though, it’s a heck of a lot easier to double revenues when you’re a $1 billion company than when you’re a $100 billion company. And financial growth more often than not begets stock growth, meaning that when small-caps charge ahead, the gains can be outstanding.
One of the best index funds to harness these fiery upstarts is the iShares Core S&P Small Cap ETF (IJR[12]). This ETF holds 602 small-cap stocks including biotech stock Questcor Pharmaceuticals (QCOR[13]) and IT shop Arris Group (ARRS[14]) — a pair of companies that have more than doubled in the past year.
While there are a number of small-cap funds out there, IJR has boasted some of the best returns on a consistent basis, and Morningstar rates it four stars — better than the iShares Russell 2000 ETF (IWM[15]), which tracks the most popular small-cap index, the Russell 2000. IJR also features a low expense ratio of 0.17%.
Read more about the IJR here.

Best Index Funds – Vanguard FTSE Developed Markets ETF (VEA)

[17]Index: FTSE Developed ex North America Index (Global, developed-market index)
Expenses: 0.09%
You’ve got the U.S. pretty well taken care of between VOO and IJR. Next up — the world.
The Vanguard FTSE Developed Markets ETF (VEA[18]) is one of the best index funds for tapping into the developed markets of Europe and Asia.
If you’re new to the term, the quick-and-dirty explanation of “developed market” is simply a country with advanced economies with higher incomes and regulated markets. The U.S., for instance, is a developed market. Kazakhstan, while an Olympic boxing powerhouse, is not a developed market.
The VEA is much like the SPY in that you’re being offered stable, blue-chip businesses that even throw off nearly 3% in dividends every year. The biggest difference is that these firms are headquartered in big European or Asian countries, but even then, many of these businesses are highly international in nature. Top holdings include Royal Dutch Shell (RDS.A[19], RDS.B[20]), Nestle (NSRGY[21]), Toyota (TM[22]) — they’re based in Netherlands, Switzerland and Japan, but all selling products right in your back yard.
Read more about the VEA here.
Next Page[23]

Best Index Funds – iShares MSCI Emerging Markets ETF (EEM)

[24]Index: MSCI Emerging Markets Index (Global, emerging-market index)
Expenses: 0.67%
Just as you want to find stability and growth by pairing large caps with small caps, so should you find stability in developed markets and growth in emerging markets (EMs).
The term “emerging” refers to the higher growth but relatively lower amount of stability in up-and-coming markets. The thought is that you have countries with burgeoning populations, escalating middle classes with more spending power, but the incomes aren’t yet up to par with higher-income countries — they’re closing the gap, though, which bodes well for the companies in those markets.
The banner EM countries are the “BRICs” — Brazil, Russia, India and, of course, China — but also include countries such as South Africa, South Korea and even Mexico.
The iShares MSCI Emerging Markets ETF (EEM[25]) is the most ubiquitous of the emerging-market ETFs, holding 800-plus EM companies. And don’t let the “emerging” moniker fool you — there are some serious players in the EEM ETF. For instance, there’s a good chance you have either a Samsung (SSNLF[26]) Galaxy smartphone, or maybe one of the company’s appliances in your home. You’ve probably never heard of Taiwan Semiconductor (TSM[27]), but you’ll be using its products if you buy an iPhone 6 or iPad Air 2 this year[28].
Read more about the EEM here.
Next Page[29]

Best Index Funds – Global X Next Emerging & Frontier ETF (EMFM)

[30]Index: Solactive Next Emerging & Frontier Index (Global, emerging- and frontier-market index)
Expenses: 0.58%
Most of the funds in this article are widely considered to be among the best index funds in their group, and have been for a while. The Global X Next Emerging & Frontier ETF (EMFM[31]) isn’t nearly as established (it launched in late 2013), but it’s a personal favorite of mine because it offers a great combination of the growthier side of the world.
You see, while the aforementioned BRICs are considered “emerging” markets by many, their economic growth has slowed in recent years. Thus, investors looking for the greatest international growth potential are starting to move into other less-ballyhooed emerging markets, and even “frontier markets[32]” — riskier but more rapidly growing than even their EM counterparts.
EMFM caters to those investors, shunning the likes of China and Russia to offer heavier exposure to countries such as Malaysia, Mexico, Indonesia, Turkey and our boxing buddy, Kazakhstan.
Is EMFM a substitute for EEM? Yes and no. If you’re looking for one single place to get “emerging” growth, then you’re certainly choosing between the two. However, the two funds do provide very different global exposure, so investing in both isn’t necessarily a bad way to use your money.
Read more about EMFM here.
Next Page[33]

Best Index Funds – Vanguard Total Bond Market ETF (BND)

[34]Index: Barclays U.S. Aggregate Float Adjusted Bond Index (Broad U.S. bond index)
Expenses: 0.08%
There are scores of different bond flavors — Treasuries, munis, corporate investment-grade debt, junk — with varying amounts of safety and yield. But at their most base level, most people invest in bonds for the interest income.
Vanguard Total Bond Market ETF (BND[35]) invests in a wide swath of these bonds (though it’s heaviest in Treasuries) with a broad range of maturities to provide investors with a relatively stable investment that offers a modest yield.
As of right now, BND provides an SEC yield of 2.1% — nothing to scream about, but that’s fine. The important thing to note about BND and other modestly yielding debt investments is that you’re not necessarily trying to grow money — just preserve it. That’s not necessarily important to do when you’re younger, but when you have fewer years until retirement, it’s good to start locking down some of your money and collecting interest.
Note: If you’ve noticed a few Vanguard funds, there’s a reason — Vanguard is the low-cost king of funds, be they mutual or exchange-traded. BND is among the best index funds you can get on the cheap, at just 0.08% in expenses.
Read more about BND here.
Next Page[36]

Best Index Funds – iShares U.S. Preferred Stock ETF (PFF)

[37]Index: S&P U.S. Preferred Stock Index (U.S. preferred stock index)
Expenses: 0.48%
However, there is one fantastic source of not just stable income, but substantial, stable income: preferred stocks.
If you want a primer, you can check out my gush-fest on preferred stocks here. But in short, preferred stocks are often referred to as a “hybrid” security because they feature some traits of stocks (they represent equity, you can buy them on exchanges), and some of bonds (they pay a fixed dividend, and they don’t have any voting rights).
Also like bonds, you invest in preferred stocks for the income – and boy, do they throw off a lot of it.
The largest preferred-stock ETF out there, the iShares U.S. Preferred Stock ETF (PFF[38]), boasts a fantastic yield of 6.5% for just 0.48% in fund expenses. It holds more than 300 preferred stocks, most of them representing companies in the financial, real estate and insurance sectors.
You won’t get rich overnight investing in PFF, but reinvesting 6% in dividends every year and sitting back while compounding does its thing will give you a sizable pot of money at the end of the rainbow. Or, if you’re already near retirement, the monthly dividend payout makes a great source of regular income.
Read more about PFF here.
Kyle Woodley[39] is the Deputy Managing Editor of InvestorPlace.com[40]. As of this writing, he was long PFF and VOO and may initiate a position in EMFM within the next 30 days. Follow him on Twitter at @KyleWoodley[41].

 

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emerging markets: CIVETS and BRICS (wsj)

Monday, September 19, 2011

The Wall Street Journal Wealth Adviser



By JOHN GREENWOOD

Ten years after Brazil, Russia, India and China were dubbed the BRICs, any early mover advantage for investing in those economies has long gone.

.But lovers of acronyms will be relieved to learn the latest investment theme claiming to steal a march on emerging markets also has a catchy name: CIVETS.

The so-called CIVETS group of countries—Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa—are being touted as the next generation of tiger economies, even if they are named after a more shy and retiring feline mammal.

These nations all have large, young populations with an average age of 27. This, or so the theory goes, means these countries will benefit from fast-rising domestic consumption. They also are all fast-growing, relatively diverse economies, meaning they shouldn't be as heavily dependent on external demand as the BRICs.

HSBC Global Asset Management launched the first fund specifically targeting these countries, the HSBC GIF CIVETS fund, in May. HSBC points to rising levels of foreign direct investment across the grouping, low levels of public debt—except for Turkey—and sovereign credit ratings moving toward investment grade.

Critics say CIVETS countries have nothing in common beyond their youthful populations. Furthermore, they say, liquidity and corporate governance are patchy and political risk remains a factor, particularly in Egypt.

"This sounds like a gimmick to me," says Darius McDermott, managing director at Chelsea Financial Services. "What does Egypt have in common with Vietnam? At least the BRIC countries were the four biggest emerging economies, so there was some rationale for grouping them together. A general emerging-markets fund would be a less risky way to get similar exposure."

Still, early numbers suggest that CIVETS investors could prosper. The S&P CIVETS 60 index, established in 2007, is ahead of two other emerging-markets indexes—the S&P BRIC 40 and S&P Emerging BMI—over one and three years.

Colombia: Colombia is emerging as an attractive destination for investors. Improved security measures have led to a 90% decline in kidnappings and a 46% drop in the murder rate over the past decade, which has helped per-capita gross domestic product double since 2002. Colombia's sovereign debt was promoted to investment grade by all three ratings agencies this year.

Colombia has substantial oil, coal and natural-gas deposits. Foreign direct investment totaled $6.8 billion in 2010, with the U.S. its principal partner.

HSBC Global Asset Management likes Bancolombia SA, the country's largest private bank, which has posted a return on equity of more than 19% for each of the last eight years.

Indonesia: The world's fourth-most populous nation, Indonesia weathered the global financial crisis better than most, helped by its massive domestic consumption market. After growing 4.5% in 2009, it rebounded above the 6% mark last year and is predicted to stay there for the next few years. Its sovereign debt rating has risen to one notch below investment grade in the last year.

Although Indonesia has the lowest unit labor costs in the Asia-Pacific region and a government ambitious to make the nation a manufacturing hub, corruption is a problem.

Some fund managers see exposure best achieved through local subsidiaries of multinationals. Andy Brown, investment manager at Aberdeen Asset Management, holds PT Astra International, an auto conglomerate that is majority-owned by Jardine Matheson Group.

Vietnam: Vietnam has been one of the fastest-growing economies in the world for the past 20 years, with the World Bank projecting 6% growth this year rising to 7.2% in 2013. Its proximity to China has led some analysts to describe it as a potential new manufacturing hub.

But communist Vietnam only became a member of the World Trade Organization in 2007. "The reality is that investing in Vietnam is still a very laborious process," Mr. Brown says.

Cynics suggest Vietnam is included within the CIVETS to make the acronym work. The HSBC fund has only a 1.5% target allocation to the country.

Egypt: Revolution may have put the brakes on the Egyptian economy—the World Bank is predicting growth of just 1% this year, compared with 5.2% last year—but analysts expect it to regain its growth trajectory when political stability returns.

Egypt's many assets include fast-growing ports on the Mediterranean and Red Sea linked by the Suez Canal and its vast untapped natural-gas resources.

Egypt has a big, young population—82 million strong and with a median age of 25. Aberdeen says National Société Générale Bank (NSGB), a subsidiary of Société Générale SA, is well-positioned to take advantage of Egypt's underdeveloped domestic consumption.

Turkey: Located between Europe and major energy producers in the Middle East, Caspian Sea and Russia, Turkey has major natural-gas pipeline projects that make it an important energy corridor between Europe and Central Asia.

"Turkey is a dynamic economy that has trading links with the European Union but without the constraints of the euro-zone or EU membership," says Phil Poole of HSBC Global Asset Management.

The World Bank is predicting growth of 6.1% this year, falling back to 5.3% in 2013.

Mr. Poole rates national air carrier Türk Hava Yollari as a good investment, while Mr. Brown prefers fast-growing retailer BIM Birlesik Magazalar A.S. and Anadolu Group, which owns brewer Efes Beer Group.

South Africa: Rising commodity prices, renewed demand in its automotive and chemical industries and spending on the World Cup have helped South Africa—a diversified economy rich in resources such as gold and platinum—resume growth after it slipped into recession during the global economic downturn.

Many see the nation as a gateway to investment into the rest of Africa.

HSBC sees long-term growth potential in mining, energy and chemical firm Sasol Ltd.

Mr. Greenwood is a personal-finance writer in London. He can be reached at reports@wsj.com.

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

What does Dubai mean to you? (El-Erian in The Daily Telegraph )

Dubai: what the immediate future holds
Until last Wednesday, most investors saw Dubai as an attractive tourist destination, a regional financial centre and an example of what bold and visionary leadership can achieve.

By Mohamed A El-Erian
Published: 12:23AM GMT 29 Nov 2009

Some worried that Dubai's impressive achievements came with a debt burden that would prove difficult to sustain after last year's financial crisis.

This weekend, investors around the world are united in wondering "what does Dubai mean for me?"


At the local level, the standstill is an explicit recognition that the Emirate's debt and leverage levels cannot be sustained in what, at PIMCO, we have called the "new normal". The question for Dubai is now two-fold: can an orderly extension of debt payments be achieved; and how will this impact the risk premium that is attached to other economic and financial activities in the Emirate?

The key issue at the national level is how Abu Dhabi, the largest and richest of the seven UAE Emirates, will react. Here, it is a question of willingness. The leaders of Abu Dhabi must strike that delicate balance between using enormous wealth to support Dubai and ensuring appropriate burden sharing among those that repeatedly failed to heed Abu Dhabi's past warnings about the excesses in Dubai.

The regional dimension is captured by a word familiar to investors in emerging markets: "contagion". The immediate reaction of almost all markets (and too many commentators) is to lump together countries in the region that have very different characteristics. Witness how market measures of risk have surged for all the oil exporters in the region even though they share none of Dubai's debt and leverage characteristics.
At the global level, the Dubai announcement serves as a catalyst to take the froth off expensive financial markets. For the last few months, massive injections of liquidity (primarily by the US), aimed at limiting the adverse impact of the financial crisis on employment, have turbo-charged financial market valuations rather than make their way to the real economy. While many have worried about the generalised over-extension of equity markets, most have hesitated to take money off the table as there did not appear to be a catalyst to break the general "trend is your friend" mentality. Dubai is that catalyst.

So, what next?

First, it will take time to sort out the Dubai situation. Inevitably, this is an uncertain and protracted process that involves both on- and off-balance sheet exposures. It will cast a cloud not only on companies in the Emirate itself but also on institutions that have large exposures there, especially in the banking and real estate sectors.

Second, the immediate indiscriminate sell-off in regional (and emerging market) names will, over time, give way to greater differentiation based on economic and financial realities. Those with strong fundamentals will recover (including Abu Dhabi, Brazil, Kuwait, Qatar and Saudi Arabia) while others, including countries with large deficits and debt burdens in eastern/central/southern Europe, may come under more pressure.
Finally, and most importantly, Dubai serves as a warning to those that were quick to find comfort in the sharp market rally of the last few months. Since the summer, the appreciation of risk assets has been driven predominantly by artificial liquidity injections rather than fundamentals. The Dubai announcement is a reminder that a flood of government-induced liquidity cannot mask all excesses, all the time.
Investors should treat last Wednesday's announcement as an illustration of the lagged financial effects of the global financial crisis. The Dubai situation is no different than that facing commercial real estate in the US and UK.
Let Dubai be a reminder to all: last year's financial crisis was a consequential phenomenon whose lagged impact is yet to play out fully in the economic, financial, institutional and political arenas.

Mohamed A El-Erian is CEO and co-CIO of PIMCO, the investment management firm

Bargains in Emerging Markets (from Smartmoney.com)

As the U.S. struggles to reverse the economic slide, some emerging markets are ahead of the game. The International Monetary Fund projects that while the world’s advanced economies will contract this year, emerging economies will expand by as much as 2.5 percent, and some countries will grow a lot faster. Even better news: Some pros are finding they don’t have to pay a lot to own profitable foreign stocks. The valuations on foreign stocks have become “very, very attractive,” says Uri Landesman, chief equity strategist for asset manager ING Investment Management Americas.

It was only two years ago that investors plowed more than $16 billion into emerging-market mutual funds, trying to find the next big Chinese Internet start-up or Russian coal mine. Unfortunately, like many investing trends, a lot of people piled into emerging-market stocks just as they peaked. Growth did slow around the world, and the stocks tanked. Even with this spring’s market rally, emerging-market stocks, as a group, have lost more than 40 percent since October 2007.
However, many of these nations are not mired in the housing market disasters that plague wealthier countries, and their banking systems are healthier as a consequence. Meanwhile, millions of people in these nations are moving into their middle class. The fortunes of these countries aren’t completely beholden to the health of the U.S. economy, either. China’s economy, for example, is expected to grow at least 5 percent in 2009.
For decades, stocks in China, Chile and other emerging nations traded at a significant discount to their American counterparts. By mid-2007, some were trading at a premium. The market wipeout brought emerging-market valuations closer to their normal discount. Of course, that return to normal cost some investors a lot of money, but the lower prices could give new investors a chance to buy into growing nations at a more reasonable price.
Here are five picks—all of which are listed on U.S. stock exchanges.

China Mobile
More than 160 million mobile phones were purchased in China in 2008, and analysts expect that number to grow another 5 percent this year. That bodes well for Hong Kong-based China Mobile, which has almost 75 percent market share of mobile-phone service in China. It has 470 million subscribers—a throng 50 percent larger than the entire U.S. population. Amazingly, analysts estimate there are still several hundred million Chinese who don’t yet have a mobile phone but eventually could. In the short term, if cash-strapped consumers are forced to choose between a landline and a mobile phone, they usually opt to go wireless, says Phil Kendall, director of the global wireless practice at market research firm Strategy Analytics.

The Chinese government restructured the country’s phone industry last year, allowing its biggest landline company, China Telecom, to join a wireless market formerly occupied by just China Mobile (CHL: 50.74*, +0.06, +0.11%) and China Unicom. But even with the competition, China Mobile’s dominant market position allows the company to negotiate favorable rates with vendors. In 2007 the company launched its own instant-messaging system for its phones, allowing it to keep more revenue than if it used a system made by Microsoft or another firm.

China Mobile’s stock trades at about 11 times 2010’s expected profits, well below its 10-year average price/earnings ratio of more than 24. China Mobile has said the sluggish economy and increased competition will temper its growth this year, but it will still grow. Many analysts remain confident the company will continue to increase revenue and profits steadily over the next several years, global recession or not. In the meantime, the stock has a 3.9 percent dividend yield, so investors are paid to wait for the economy to improve.

HDFC Bank
Many of the senior executives of Mumbai-based HDFC Bank (HDB: 101.20*, -0.83, -0.81%) are native Indians who worked for Citibank and other Western banks outside India. But when they opened their bank in 1995, when there were very few private banks in India, they came home to serve Indian customers. As banks worldwide loaded their balance sheets with exotic, risky mortgages, HDFC stuck with serving India’s burgeoning middle class. About 70 percent of HDFC’s revenue still comes from plain old retail banking, like issuing credit cards and loaning money to small businesses. That has kept it from having to take write-downs that burdened many other banks, says Ferrill Roll, portfolio manager for Harding Loevner, which owns HDFC shares.

HDFC’s toughest competition is from state-owned banks. While HDFC branches offer more efficient service, according to analysts, state-run banks reach much more of India’s 1.1 billion population. In India, government banks carry the perception of increased safety, and consumers worldwide find it annoying to switch banks.

Despite these challenges, HDFC is well positioned to attract new customers. Over the next two decades, the country’s middle class will grow from about 5 percent of the population to more than 40 percent, creating the world’s fifth-largest consumer market, according to McKinsey & Co. Assuming HDFC keeps up its superior customer service, it stands to capture a large share of this new market.

HDFC shares have rallied sharply in recent weeks, so investors might want to wait for a pullback before buying. With a P/E ratio of 21 times next year’s estimated earnings of $590 million, HDFC is not the cheapest bank stock. But analysts expect the bank to increase profits 25 percent in its fiscal 2010 (which started in April) and another 26 percent in fiscal 2011. “It’s one of the best-managed banks in the world,” says Cabot Money Management’s Lutts, who also owns the stock.


Vale
The booming economies of China, India and other emerging nations gave mining firm Vale (VALE: 19.24*, -0.13, -0.67%) years of spectacular profit and revenue growth, solidifying its position as one of Brazil’s largest companies and the world’s largest producer of iron ore. Vale’s main competitive advantage over rivals BHP Billiton of Australia and English firm Rio Tinto is its top-quality, plentiful iron ore deposits, says Tony Robson, cohead of mining research at BMO Capital Markets. China is the biggest market for Vale’s iron ore, accounting for more than 17 percent of the company’s revenue. China’s steel production (iron ore is a primary component of steel) is expected to decline only slightly this year, thanks to the nation’s quick implementation of an infrastructure-focused economic stimulus package, says Jorge Beristain, head of Americas metals and mining research for Deutsche Bank Securities. Vale has expanded its client base in China, adding small and medium-size steel mills to compensate for the reduced demand from the larger mills. Vale CEO Roger Agnelli has said he expects iron ore exports to China to hold steady for the rest of 2009.


Still, the global downturn has forced the Rio de Janeiro–based firm to scale back projects and cancel some others, and the company recently cut its capital spending plans for 200 to $9 billion from $14 billion. Investors have pounded down Vale’s shares over the past year as the price of iron ore has tumbled. Longer term, however, many analysts are confident that Vale will benefit from an economic recovery worldwide. In the meantime, the stock trades at 13 times this year’s expected profits of $8.5 billion.


SQM
It certainly helps any company to have a corner on the market. Half the customers who buy specialty fertilizer from Chile’s Sociedad Química y Minera de Chile (SQM: 36.26*, -0.59, -1.60%) can’t easily substitute anything else for the product, says Brian Chase, head of Southern Cone and Andean Equity Research and Strategy for J.P. Morgan. Crops such as tobacco, wine grapes and blueberries need special fertilizers that only SQM can provide in the region.

Much of SQM’s competitive advantage comes from its access to the Atacama Salt desert in Chile, land rich with nitrates, iodine, potash and lithium, all useful in fertilizer production. Besides having a monopoly on fertilizer in Chile, SQM also claims a 30 percent share of the world’s market for lithium (used in hybrid-car batteries) and 33 percent market share of iodine (used in X-ray dye and LCD televisions). Asia accounted for 15 percent of SQM’s $1.8 billion in revenue last year, and Chase expects that share to rise as China increases its fertilizer imports to help feed its people.

SQM is not immune to the global downturn, of course. Many fertilizer stocks, including SQM’s, fell dramatically in the second half of 2008 as fertilizer prices dropped. Yet demand for the company’s all-organic fertilizer should continue to grow. Farmers need to use organic fertilizer to have their fruits and vegetables certified as organic by the U.S. Department of Agriculture and similar government bodies in other countries. Demand for high-end fertilizer might actually increase in an economic slowdown, as people eat at home more and seek out high-quality ingredients, says Jim O’Leary, manager of the Touchstone International fund.

Analysts predict a modest bump in SQM’s earnings this year over last. In 2008, SQM posted earnings of $501 million, a 179 percent increase over 2007 earnings. Don’t expect such a monster gain this year, but analysts still predict a 14 percent gain in profits. The stock trades at about 22 times estimated earnings of $627 million, about its 10-year average P/E.

CNOOC
As the global economy slowed and the price of oil tanked over the past year, oil companies around the world pulled back on drilling for crude. But that’s not the case with China National Offshore Oil Corp., the giant firm that brings up oil from, you guessed it, the ocean waters off the coast of China. The firm, commonly known as CNOOC (pronounced see-nook) is increasing its capital spending by 19 percent in 2009, to $6.8 billion. The company can sell anything it brings up from the ocean floor. In fact, Hong Kong–based CNOOC (CEO: 141.35*, +0.28, +0.19%) sells oil to its major Chinese rivals because the other two can’t produce enough on their own.

CNOOC is majority-owned by the Chinese government. It teams up with major oil companies that have the expertise to build and operate offshore drilling platforms. When they find oil, CNOOC shares in the profits. When they don’t, the foreign companies bear all the costs.

Don’t expect its profits to be even close to the $6.4 billion in made in 2008, however, because the price of oil has fallen to around $60 from its $147 peak last July. CNOOC has no refining business, so its profits are tied almost exclusively to the price of crude. Still, it cost the company, on average, only about $20 to bring up a barrel of oil from the sea in 2008, Xiao Zongwei, CNOOC’s general manager of investor relations, told SmartMoney. So even if the price of oil resumes its descent, CNOOC should yield fatter profit margins relative to other oil companies, says Steve Cao, comanager of the AIM Developing Markets fund, which also owns the stock.

At nearly 16 times this year’s lower profits, CNOOC is not a steal. But some analysts feel that its growth prospects over the long term should command a premium. China’s fuel needs will only rise as the country’s growing middle class hits the road in its new cars, analysts say.