After a sharp retreat this year, stocks in emerging-market (EM) nations appear to offer much bigger bargains than those in the Standard & Poor’s 500 Index. But they also tend to be a staggering 60% more volatile. One way to take advantage of the opportunities but safeguard against the dangers is to invest in funds that excel at damping the volatility of EM stocks.
Last year, EM stocks, benefiting from strong global economic growth, soared 34%, based on an MSCI benchmark index, compared with 22% for the S&P 500. This year, they fell 9.5% through September 30, while the S&P 500 gained 10.6%. Investors have been worried that a trade war with the US would hurt China, the largest EM economy…and that a stronger US dollar would make it harder for EM companies and governments to repay their dollar-denominated debts.
Here are two EM funds with solid long-term performance that have been about 20% less volatile than their peers over the past five years…
American Funds New World (RNWGX). This actively managed fund, which is offered in a no-load version mainly in employee retirement plans, smooths out returns by investing at least one-third of its portfolio in large, developed-nation companies, such as Nike and Royal Dutch Shell, that derive significant revenue from emerging markets. It invests in about 350 stocks and adds EM bonds to the mix to reduce volatility. Five-year annualized return through September 30: 4.6%.
iShares Edge MSCI Minimum Volatility Emerging Markets ETF (EEMV). This exchange-traded fund (ETF) holds about 300 stocks, mostly in Asian emerging markets, of companies that have strong cash flow and a history of relatively low volatility. Five-year annualized return: 2.7%.