The second point is that emerging markets are much less volatile than they have been in recent history. A stock's volatility is roughly approximated by its beta, a calculation of its relation to the broader market. If the market rises by 10%, and a stock rises by 20%, it's said to have a beta of 2. Emerging market indexes historically recorded a beta of roughly 1.8 times that of the S&P 500. Today it has fallen to 1.2 as developing businesses mature, governments improve, and more sophisticated investors enter markets.
Third, skyrocketing dividend growth rates in the developing world aren't even close to those in developed markets. Over the past 10 years, the MSCI Emerging Market index has grown dividends by 15% annually compared to 5% in the S&P 500. It now yields 3.5% vs. the S&P's 2.1%. And in the past three years dividend growth in developing markets has stayed positive as the S&P 500's dividend payment has dropped by 5%.
There are a couple ways regular investors can play it. Exchange-traded funds offer broad baskets of stocks and charge a management fee that's often just a fraction of those at mutual funds. The most popular ETF is Vanguard's MSCI Emerging Markets ETF, which holds large cap stocks such as Samsung Electronics of South Korea and China-based Tencent. It charges a fee of 0.22%. The PowerShares FTSE RAFI Emerging Markets Portfolio is similar to Vanguard's fund, except it weighs emerging market companies according to their book value and cash flow instead of market capitalization. That protects against holding too many bubble-type stocks. It charges 0.85%. Holderith's firm, Emerging Global Advisors, runs an ETF called focused on emerging market consumer spending which includes 30 leading companies in countries like Mexico and India. It charges 0.85%.
For now, the argument whether to own emerging markets seems over: they offer growth found nowhere else. The fight over the best way to tap into it might just be heating up.
