Betting on Emerging Markets Like Ray Dalio

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Mar 18, 2015

Ray Dalio (Trades, Portfolio)’s Bridgewater Associates is one of the largest investors in iShares MSCI Emerging Markets Indx (ETF) (EEM, Financial) as it reported holding 78.54 million shares, down by 2% on the quarter.

Exchange Traded Fund (ETF)

An ETF is a special type of fund that invests in a portfolio of stocks or bonds. The aim is to mimic the performance of a specified index. As well as the shares, they are traded in the secondary market at any time (market hours) and investors can sell short.

The advantages of this investment vehicle are that they provide an efficient method of diversification because investors gain exposure to an index or a particular sector. Investors know the composition of the fund at all times. Moreover, as they are a passive managed fund, they have good operating expense ratios.

The EEM ETF

It is a passively managed ETF designed to provide a broad exposure to the equity markets in the emerging economies (China 17.32%, South Korea 15.05%, Taiwan 13.2%, India 7.84%, South Africa 7.7%, Brazil 7.1%, Hong Kong 5.32%, Mexico 4.82%, Russia 3.59% and Malasya 3.57%).

This ETF holds emerging market stocks that are principally mid and large-cap. It manages a multi-billion asset base and the top ten Holdings accounts for 18.75% of the portfolio. Among these companies are: Samsung Electronics (KRX:005930, Financial), Taiwan Semiconductor (TWSE:2330, Financial), Tencent Holdings (SEHK:0700, Financial), China Mobile (SEHK:0941, Financial) and China Construction Bank (SEHK:0939), Ind &Comm BK of China.

Risk and return

All of the recent news in the financial markets will lead to a strengthening of the U.S. dollar. Getting stronger it may reduce the returns of this fund. Further, the weakness in the rest of the world could make a sudden reversal in cash inflows in emerging economies.

The ETF has returned an annual rate of 0.51% over the past 5 years, 3.16% in one year and -1.35% year-to-date.

Final comment

The fund has a great diversification and a good allocation to different countries, which is currently seen as a potential for higher returns. However, investor should be aware of some risks that we mentioned previously.

We continue believe that emerging markets are operating under less-favorable macroeconomic and external conditions, so for those investors seeking to invest their money in an ETF with exposure to large cap equities, this ETF is a good option because it offers diversification and has a relative low expense ratio compared to the average charged by similar funds.

Hedge fund managers have also been active in the company. Gurus like Sarah Ketterer (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Jim Chanos (Trades, Portfolio) have taken long positions in the fourth quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned.