What to Consider Before Adding This Emerging Markets ETF to Your Portfolio
Key Points
The iShares Core MSCI Emerging Markets ETF (IEMG) has doubled the performance of the Vanguard S&P 500 ETF (VOO) over the past year.
The upside of attractive valuations and better growth opportunities has helped unlock value in this long-underperforming group.
Real estate, geopolitical, and demographics risks in China, however, could damage the growth narrative.
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Over the past year, emerging markets have nearly doubled the performance of the S&P 500. The iShares Core MSCI Emerging Markets ETF (NYSEMKT: IEMG) has returned 43% compared to a 24% return for the Vanguard S&P 500 ETF (NYSEMKT: VOO) over the same time.
The combination of attractive valuations, faster economic growth opportunities, and a weaker dollar has produced one of the best stretches for emerging markets stocks relative to the S&P 500 in more than a decade.
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But before you consider adding the iShares Core MSCI Emerging Markets ETF to your portfolio, there's one factor you should consider carefully: China.
Image source: Getty Images.
Despite deep underperformance over the past several years, China still accounts for roughly 18% of this ETF. Economic growth rates have fluctuated. Weakness in the real estate sector, geopolitical risks, weakening demographics, and, most recently, the negative impact of the global oil supply shock have raised major questions about the country's near-term outlook.
The good news is that China's influence on emerging market indexes has diminished significantly in recent years. Growth-oriented economies, such as Taiwan, South Korea, and India, have been the driving force behind recent returns. That'll likely remain the case as the artificial intelligence (AI) buildout continues.
It's still a good idea to have exposure to China, seeing as it's one of the largest economies in the world. But the relatively modest exposure to it in the iShares Core MSCI Emerging Markets ETF means you can capture the fast-growth upside story without overexposing yourself to downside risk.
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David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
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