VWO: An International Investor's Perspective On Avoiding Emerging Markets

seekingalpha04-04

VWO ETF has underperformed US and global equities in the past decade due to the decline of emerging markets. Investors were sold a growth story that did not materialize.I believe the Fund will ...

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Investors were sold a growth story that did not materialize.I believe the Fund will ...</p>\n\n<a href=\"https://seekingalpha.com/article/4682113-vwo-an-international-investors-perspective-on-avoiding-emerging-markets\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>VWO: An International Investor's Perspective On Avoiding Emerging Markets</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nVWO: An International Investor's Perspective On Avoiding Emerging Markets\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-04 19:44 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4682113-vwo-an-international-investors-perspective-on-avoiding-emerging-markets><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>VWO ETF has underperformed US and global equities in the past decade due to the decline of emerging markets. Investors were sold a growth story that did not materialize.I believe the Fund will ...</p>\n\n<a href=\"https://seekingalpha.com/article/4682113-vwo-an-international-investors-perspective-on-avoiding-emerging-markets\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"VEU","symbol_name":"Vanguard FTSE All-World ex-US ETF","start_time":0,"source_url":"https://seekingalpha.com/article/4682113-vwo-an-international-investors-perspective-on-avoiding-emerging-markets","article_id":"2424360076","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1020325488/image_1020325488.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2424360076","pubTimestamp":1712231088,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"VWO ETF has underperformed US and global equities in the past decade due to the decline of emerging markets. 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Investors were sold a growth story that did not materialize.I believe the Fund will continue to underperform in the future because emerging markets tend not to be shareholder-oriented and they carry a high political risk.Emerging markets are full of potential growth stories, but opting for a diversified Emerging Market ETF like VWO won't give you sufficient exposure to these opportunities.A preferable strategy is to invest indirectly in Emerging Markets via US stocks or opt for cherry-picking, accepting a higher risk.AsianDream The Vanguard FTSE Emerging Markets Index Fund ETF (NYSEARCA:VWO) follows the performance of the FTSE Emerging Markets All Cap China A Inclusion Index. It charges a low fee of 0.08% and manages over 100 billion USD. It's an affordable option for investing in emerging markets, particularly in the 'BRICS' countries (Brazil, India, China, South Africa and, until 2022, Russia), which make up more than half of the fund. According to Vanguard's own product statement, the VWO ETF is \"only appropriate for long-term goals.\" VWO lacks a credible growth story VWO was introduced in the mid-2000s, aiming to let investors capitalize on the growing interest in emerging markets. Unfortunately, it hasn't met these expectations. I don't see this trend of underperformance changing anytime soon. The main reasons I believe emerging markets will continue to fall short compared to the US market include a lack of shareholder orientation and unstable political conditions. These issues have been the root causes of VWO's disappointing performance over the past decade. Before we explore those factors in detail, we'll begin by examining the past performance of the VWO ETF. VWO: underperforming since inception Investors who placed their bets on emerging markets using the VWO ETF during the 2010s saw very poor results. To grasp how significant this underperformance was, let's compare the past performance of the VWO ETF with two other Vanguard ETFs:  Vanguard Total Stock Market Index Fund ETF (VTI) - tracking the total US stock market. Vanguard FTSE All-World ex-US Index Fund ETF Shares (VEU) - tracking the total world's stock market excluding the US.  I am comparing the VWO ETF with other Vanguard ETFs to have a fair comparison as these are all ETFs from the same issuer with similar liquidity and fees. VWO performance in the past 10 years (Seeking Alpha) VWO performance in the past 5 years (Seeking Alpha) Over the last 5 and 10 years, the VWO ETF has remained nominally flat, showing that the expected growth of emerging markets never happened. This is because emerging markets, including the BRICS nations, did the complete opposite of what was expected - they moved away from democracy, globalization, and capitalism. Brazil went on to experience a second \"lost decade\", with disappointing economic growth, growing unemployment and a lack of substantial economic reforms. Russia invaded Ukraine twice and it is now a pariah state that receives military aid from North Korea. It stopped being part of the VWO ETF after invading Ukraine in 2022 as a result of international sanctions. China gradually dismantled Deng Xiapoing's reforms and started acting like a world power. South Africa experienced a decade of increasing political instability and an average yearly GDP growth between 2010 and 2020 below 2%. India was the only country in the BRICs block that enjoyed a period of economic growth and kept enjoying a democratic state. The performance of the Indian market is the only element that kept the VWO ETF from total collapse, along with the boom in Taiwan's microchip industry. Today, Taiwan Semiconductor Manufacturing Company Limited (TSM) makes up 6% of the ETF. VWO ETF - performance by index (Seeking Alpha) Why VWO will keep underperforming: no shareholder focus in emerging markets A common argument for investing in emerging markets is that it lets investors be part of the growth in these markets. But is this true? Can foreign investors really benefit from investing in a company that is partly owned by a government that says it will always put its citizens' needs before the investors'? In my opinion, emerging markets are not as shareholder-oriented as the USA. To prove this statement, I propose the use of 2 indicators:  The Worldwide governance indicator by the World Bank measures political stability, government effectiveness, regulatory quality, rule of law and control of corruption. The Index of Economic Freedom by The Heritage Foundation gauges the global impacts of liberty and free markets by taking into consideration property rights, government integrity, judicial effectiveness, tax burden, and government spending.  The USA currently ranks between the 70th and the 95th percentile across all metrics measured by these indexes. In other terms, this means that the USA is \"better\" than 70% to 95% of other countries when it comes to economic freedom and ease of doing business. The results of the USA are not excellent in absolute terms. Notably, they have been declining in the past 5-10 years. However, this does not matter when comparing to VWO, because 9 out of the top 10 countries where the VWO ETF invests rank lower than the USA according to both the index of economic freedom and the worldwide governance indicator. These 9 countries represent 72% of the exposure of the ETF. The only notable exception is Taiwan, a country that weighs 19.40% of the VWO ETF but it is 3% the size of the USA in terms of GDP. It is also, along with India, the reason why the VWO ETF has not returned nominally negative returns in the last 10 years. Generally, most of the countries that rank better than the US are micro-states and/or do not have a significant stock market. The only notable exceptions are Germany, Switzerland and The Netherlands, which are ranking better than the US in (some of) these metrics. They are anyway not part of the VWO ETF, since they are not emerging markets. Another element that makes me think about how the VWO ETF is exposed to companies that are not shareholder friendly is the level of government involvement in its top holdings. Government involvement in top VWO 25 holdings (Analyst elaboration of publicly available data) Government involvement in top VWO 25 holdings (Weighted) (Analyst elaboration of publicly available data) The 25 top holdings represent ~25% of the VWO ETF. Of these, 64% are either participated or fully owned by governments. When weighted by their position in the ETF, roughly 50% of the top 25 companies, representing 12.5% of the whole ETF, are government owned or participated. This heavy government participation is reflected in the holdings breakdown by industry. Almost 22% of the fund is invested in the financial sector, a highly regulated and government intertwined industry. Breakdown by industry, top VWO holdings (Vanguard.com) As more qualitative examples, consider how the top 2 holdings in the VWO ETF are Alibaba Group Holding Limited (BABA) and Tencent Holdings Limited (OTCPK:TCEHY), two Chinese Tech conglomerates that have been regulated to death under Xi Jinping's tenure in China. The #1 holding in the VWO ETF is Taiwan Semiconductor Manufacturing Company Limited, a company whose assets the US have declared they will blow up in case of a Chinese invasion of Taiwan. These 3 companies alone represent 10% of the VWO ETF. The VWO ETF is also invested in Petróleo Brasileiro S.A. (PBR) for slightly more than 1% of the fund's value. This is the troubled energy state company of Brazil that has been used as an electoral tool by politicians for years. To conclude, shareholder-friendly governance matters. Even if emerging countries were to see significant economic growth in the upcoming years, a foreign investor would simply not be able to access that growth, in an economic and political system that does not put shareholders first. Why VWO will keep underperforming: poor political stability in emerging markets It is my opinion that VWO is over-exposed to political risk. Political risk is, by definition, difficult to exactly quantify. Nevertheless, the market does its best to discount political risk - that's why BABA is currently trading at a FWD P/E of ~8, while AMZN is trading at a FWD P/E of ~40. To quantify the exposure of VWO to internal political risk, I propose the use of the political Stability and Absence of Violence/Terrorism. This is one of the measures of the worldwide governance indicator developed by the World Bank that we have used to evaluate economic freedom. Let's take into consideration the top 5 countries that the VWO ETF is exposed to and see how they compare with the USA in terms of political stability. Bear in mind, these 5 top countries represent ~80% of the ETF. Political Stability and absence of Violente/Terrorism (Author's elaboration of World Bank data) Once again, except for Taiwan, all other countries rank significantly lower than the USA. The only country that ranks better than the USA in the table above is Taiwan. However, what internal political stability Taiwan enjoys is more than compensated for by being on the brink of war with China. Taiwan is in the South China Sea, one of the most dangerous and contended geographical areas of this century. For reference to the political risk linked to Taiwan, the World Bank, refers to Taiwan as \"Taiwan, China\" in the database where this ranking is stored. Taiwan is currently recognized as an independent country by 13 countries in the UN. Quantifying the risk of a war is inherently difficult, not to say impossible, especially for an individual investor. But when the country that makes 21% of the VWO ETF is Taiwan, this is a political risk that must be taken into consideration by investors. The World Bank recognizes Taiwan as part of China, while reporting its data separately (The World Bank) You do not need emerging markets: US stocks are exposed to them and P/E does not matter About 29% of the revenue that US companies make comes from markets outside the US. However, this percentage has been dropping over the last few years. One of the reasons for this decline is the strong US dollar, which has been bolstered by an environment of high interest rates. Investing in US stocks does indeed cost more. Currently, the price-to-earnings (P/E) ratio of the S&P 500 is around 23, in contrast to the P/E ratio of the VWO ETF, which stands roughly at 13. But it's important to note that the P/E ratio alone doesn't tell the whole story. In fact, the P/E ratio of the VWO ETF has been on a downward trend over the past few years due to its poor performance. Despite this, the ETF hasn't been able to provide any returns to its investors. This suggests that while US stocks may appear more expensive, the cost isn't the only factor to consider when investing. The cheap valuation is a key argument of many proposers of the VWO ETF, and those in favor of a broad exposure to emerging markets via indexes. However, these markets are cheap for a reason: political risk. It is better to pay more and get exposure to emerging markets via US companies, which put shareholders at their center. Risks to this thesis One market could overperform There's a chance that in the future, just one country's exceptional performance in the VWO ETF could lead it to do better than the US or global indexes. For instance, imagine if China completely changed its approach and opened up more to foreign investors and the West. A major shift toward globalization could cause a rush in Chinese stocks, especially considering the large size of China's economy and stock market. This possibility involves politics, which makes it hard for investors to measure, but it's definitely a risk against my thesis worth considering. Collapse of the USD as a global reserve currency In case of a collapse of the USD as a global reserve currency, the VWO ETF could benefit from being exposed exclusively to foreign currencies. This scenario would most likely be quasi-apocalyptic for investors. However, if China were to emerge as a leading global power, having investments in the VWO ETF could serve as a safeguard or possibly provide a slight advantage amidst the downturn of US stocks. Conclusion: VWO does not offer an efficient way to be exposed to emerging markets There are a lot of growth stories in emerging markets. Some countries are developing in a way that is friendly to foreign shareholders. Some others are developing new global-leading technologies. India's stellar performance in the last 10 years and Taiwan's TSMC are examples of how, by cherry picking, alpha returns can be generated outside of the US and Europe. The problem is that the VWO ETF does not offer an efficient way to be exposed to the growth story of emerging markets. The ETF is over-exposed to political risk because it simply tracks the FTSE Emerging Markets All Cap China A Inclusion Index. Not all emerging markets are equal. To truly benefit from the growth of emerging markets, an investor has to be willing to take the significant risk of picking those that have a better choice at performing. The performance of the VWO ETF in the past 10 years shows that a broad exposure to emerging markets does not provide decent returns. In fact, it provides flat nominal returns or negative returns when accounting for inflation. Many investors prefer not to take on the high risk of selecting specific emerging markets and companies. Given this, my advice is to steer clear of the VWO ETF and consider putting your money into US equity ETFs, such as the Vanguard S&P 500 ETF (VOO), instead. This strategy still gives you indirect exposure to global and emerging markets through the international activities of US companies. Investing in US equity ETFs can offer a safer way to tap into the potential of overseas markets without the added risk and complexity of directly investing in emerging markets.  Only investors with a significant appetite for risk should venture into trying to select \"winning\" emerging markets.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2424360076"}