SET Monthly Issue August 2016

| August 9, 2016


When you look at investing in emerging markets, three considerations march to the head of the line… opportunity, volatility, and significant differences between one market and another.

The outlook for an emerging market like the Philippines is much different from Poland.  Lumping them all together into one basket is easy – even by region – but the mixture will quickly prove volatile.

We see this right now in Asia, where the market in Taiwan sets off fewer investor jitters than the markets in China.

This isn’t simply because the outlook for one market is sweet and the outlook for the other is sour.  It’s because of constantly percolating and constantly shifting risk.

One of the ways this underlying risk confronts investors comes in the form of timing.  Knowing when to get in and when to get out is more of a consideration with emerging markets than with domestic stocks.

The other risk is investing in what appears to be a reasonably low-risk country that suddenly goes sideways.  Venezuela and Brazil have sounded plenty of warning signals over the past few years.  But the handwriting on the wall isn’t always easy to see.

The importance of diversification, and minimizing risk while we capture the upside of emerging markets, leads us to an interesting ETF.

It’s one of the so-called Low-Vols… low volatility ETFs.  These ETFs are available in different sectors, but we believe they have a particularly useful defensive role to play on the global stage.

This investing strategy is based on the fact that over the long haul, portfolios with limited price fluctuations usually outperform portfolios with big price fluctuations.

One method of dampening the extremes is to try and manage volatility, and to take a step back from markets where volatility is strong.

This is why this month’s recommendation is the iShares MSCI Emerging Markets Minimum Volatility ETF (EEMV).


There is always an opportunity to profit from emerging markets by investing in U.S. based companies that generate significant revenues overseas.

From Exxon Mobil to McDonald’s, American companies have a long established global footprint, and are often well entrenched in emerging markets.

When we measure opportunities abroad against what’s happening here at home, we see our own U.S. economy is larger, more mature, and more stable than economies overseas.

But there is another critical difference, and it has to do with where we stand right now in the economic cycle.

The U.S. is ahead of the rest of the world when it comes to cleaning up financial systems, pushing forward through plunges in commodity prices, and managing monetary policy.

We’re ahead of emerging markets.  We’re also in a different stage of the economic cycle. This means that the kind of growth we saw with the S&P 500 between 2009 and 2014 may be about to unfold elsewhere in the world.

The stage is set.  Emerging markets have been roughed up by lower commodity prices.  This decline tends to dictate the value of exports, and reduces the value of domestic currencies because of the strength of the U.S. dollar.

There’s been monetary mayhem across the board… but not in every emerging market.  The differences between these markets can be extreme, and this is why we embrace the concept of identifying volatility and minimizing risk with an emerging market investment.

Earlier this year, we identified a specific opportunity in Chile and recommended the Aberdeen Chile Fund (CH).

Now, we are expanding our emerging market portfolio, with an eye on safety, and an opportunity to provide some additional income.


It’s right there in the name… minimum volatility.

How is this actually achieved?  The ETF weights holdings by sector.

Some countries are weighted up on a percentage basis, and some are weighted down.  It is straightforward arithmetic… as market volatility goes up, the proportion of holdings for that market goes down.

Taiwan accounts for 17% of the ETF’s assets.  Without the balancing of volatility, it would represent just 12% of the MSCI Emerging Markets Index.  Lower volatility gives Taiwan a bump up.  You see the same with Malaysia… 8.8% vs. 3.4%.

And as you would expect, the volatility pendulum swings both ways.  China has a higher level of volatility, so Chinese holdings are reduced, weighted down from 24% for the pure index to 18% for the low volatility index.

The weighting draws on two factors.  The share of the overall emerging markets each individual market represents in the MSCI Emerging Markets Index, and the underlying volatility of each market.

This is an ETF with a relatively high number of holdings, more than 250.

The IShares MSCI Emerging Markets Minimum Volatility ETF tracks an index built to provide a less-volatile exposure to emerging-markets stocks relative to a market-cap-weighted index.

When we look at the top five holdings, it’s interesting to see the relatively low percentages of any one holding, and the strong Taiwanese concentration…

The top five holdings and percentage weight for EEMV:

Company Name Country %Weight
Taiwan Semiconductor Manufacturing Co Ltd Taiwan 1.64
Tencent Holdings Ltd China 1.61
Chunghwa Telecom Co Ltd Taiwan 1.53
Taiwan Mobile Co Ltd Taiwan 1.43
IHH Healthcare Bhd Malaysia 1.40

A Closer Look At The Top 5 Holdings

Taiwan Semiconductor Manufacturing Co Ltd.

Taiwan Semiconductor is the world’s largest pure-play semiconductor business. 

Tencent Holdings Ltd.

Tencent is a Chinese holding company with investments in media, entertainment, internet, and mobile phone value-added services.

Chunghwa Telecom Co Ltd.

Chunghwa Telecom is Taiwan’s largest telecommunications company.

Taiwan Mobile Co Ltd.

Taiwan Mobile provides mobile and data services in Taiwan.

IHH Healthcare Bhd.

IHH Healthcare is a Malaysian firm that is Southeast Asia’s largest private health care and private hospital operator. 


Exposure to a market-cap-weighted index of emerging-markets stocks that focuses on less volatile investments. 


If you are investing in ETFs for income, a goal of many of our subscribers, the iShares MSCI Emerging Markets Minimum Volatility ETF should not be a core holding.

But it can be a profitable strategic complement to your more conservative funds.  It can be an income sweetener, a way to increase overall income.

Keep in mind that even though the ETF managers focus on limiting the volatility of emerging markets, the result is not the elimination of volatility.  In fact, you’ll see that this ETF has been through some prolonged periods of soft performance.

Does this strategy of managing volatility actually work?

After the 2008 financial crisis, the MSCI Emerging Markets Index had a maximum drawdown -59%.  The iShares MSCI Emerging Markets Minimum Volatility ETF fell by 49%.

By the same token, in exchange for this downside protection, investors will give up a bit on the upside.


Timing.  This is an opportune time to acquire shares, which are trading below recent highs.  The ETF has bounced off a 2016 low of $43.44.  Today, it closed at  $54.02.

Trade Alert

Buy: iShares MSCI Emerging Markets Minimum Volatility ETF (EEMV) up to $59.00

Recent Price:  $54.02

Price Target: $76.00

Stop Loss:  $52.20 


If you listened to the Bernie Sanders and Elizabeth Warren speeches as last month’s Democratic National Convention, you heard the strongest possible signals that significant changes loom ahead for the pharmaceutical and financial sectors.

Will political rhetoric translate into legislation?  If so, what will legislation actually do?

Despite the absence of detail, the premature stage of the policy process, and the uncertainties of the political landscape, the speeches were sufficiently fiery to send shivers through investors in these sectors.  Unless we see an unusually attractive opportunity, we’ll be on the sidelines for health care and finance. 


Consumer Discretionary XLY +4.02%
Consumer Staples XLP +8.00%
Energy XLE +13.44%
Financial Services XLFS -1.65%
Financials XLF +0.92%
Health Care XLV +3.58%
Industrials XLI +6.62%
Materials XLB +12.55%
Real Estate XLRE +8.81%
Technology XLK +9.83%
Utilities XLU +17.17%


 . . . . Vanguard Information Technology ETF $VGT – HOLD

We recommended this at $106.29 last month.  It has exceeded the buy up to price of $110.00 and has rewarded subscribers who invested on our recommendation with an 11% return.

We are in it for the long haul with this position.  Hold.

. . . . First Trust ISE-Revere Natural Gas Index Fund $FCG – HOLD

When the U.S. Energy Information Administration released its Short-Term Energy Outlook for natural gas last month, it reported “the highest monthly average (price) since 2015.  The increase in prices comes as production has declined and as demand for natural gas to fuel electricity generation has increased.”

For our ETF price to rise, we need this short-term trend to continue.

. . . . PowerShares S&P SmallCap Energy ETF $PSCE – HOLD

The recent retreat in crude oil prices has dragged down the entire sector, and our small cap ETF has paid the price.  We anticipate a reversal of the trend, and the price to rebound.

The price target is $17.50.  Continue holding.

. . . .  First Trust NASDAQ Community Bank Index Fund $QABA – BUY            

It’s a familiar story.  When interest rates rise, community and regional bank stocks should do well.  The waiting game continues.

The price target is $46.00.

. . . . Aberdeen Chile Fund $CH – HOLD

Chile’s economy is stuck in a holding pattern.

GDP growth may be decelerating.  Consumer confidence is sagging and the unemployment rate is edging up.

But behind the scenes, the stage is set for better times ahead.  That’s because copper prices are firming up.  Copper is Chile’s #1 export.  There was a copper price surge in late June, and the value of the Chilean peso is increasing.

The price target is $11.00.  Hold.

. . . . SPDR S&P Homebuilders $XHB – HOLD

America’s new home sales have now hit an eight-year high.  They were up 3.5% in June to reach a seasonally adjusted rate of 592,000.

The price target is $50.00.  Continue holding.

. . . . Utilities Select Sector SPD $XLU – HOLD

The ETF has a trailing 12-month dividend yield of 3.1%.  That’s not cause for celebration, but it beats the 2% yield of the S&P, and it thrashes the current 10-year Treasury yield of 1.56%.  Continue holding.

Portfolio Changes

  • This month we’re buying iShares MSCI Emerging Markets Minimum Volatility ETF $EEMV up to $59.00.
  • Move Vanguard Information Technology ETF $VGT from Buy to Hold.

Category: SET Monthly Issues

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