Download Motley Fool Asset Management - AAII

The Hidden Dangers of
ETFs
November 10, 2012
- Not For Duplication Or Redistribution -
Reason #1 to Own Emerging Markets
Market
2011 GDP
Growth
GDP/Capita
Public
Debt/GDP
2012 GDP
Growth (Est.)
2013 GDP
Growth (Est.)
USA
1.7%
$48,427
69.4%
3.3%
3.8%
EU
1.6%
$34,488
93.0%
-3.0%
3.1%
China
9.2%
$5,430
43.5%
9.6%
10.0%
India
7.2%
$1,350
51.6%
5.9%
11.1%
Brazil
2.7%
$12,674
54.4%
-2.0%
3.3%
Mexico
4.0%
$14,987
37.5%
4.3%
6.7%
Indonesia
6.5%
$3,490
24.5%
9.8%
14.2%
Source: CIA World Factbook and IMF.
2
Reason #2 to Own Emerging Markets
Market
October 2009
P/E
October 2010
P/E
Recent P/E
USA
18.0
17.5
16.5
China
40.7
32.1
14.7
Source: Motley Fool research.
3
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
Sep-05
Reason #3 to Own Emerging Markets
Strength of USD
5.00%
0.00%
-5.00%
-10.00%
-15.00%
Strength of USD
-20.00%
-25.00%
-30.00%
4
Developed Markets
Oct-12
May-12
Dec-11
Jul-11
Feb-11
Sep-10
Apr-10
Nov-09
Jun-09
Jan-09
Aug-08
Mar-08
Oct-07
May-07
Dec-06
Jul-06
Feb-06
Sep-05
Apr-05
Nov-04
Jun-04
Jan-04
Aug-03
Mar-03
Oct-02
May-02
Dec-01
Jul-01
Feb-01
Sep-00
Reason #4 to Own Emerging Markets
Returns since 2000
400.0%
350.0%
300.0%
250.0%
200.0%
150.0%
100.0%
50.0%
0.0%
-50.0%
-100.0%
Emerging Markets
5
Emerging Markets Composite
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
The Problem with Emerging Market ETFs
Category v. ETF Representation
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
-20.0%
-40.0%
-60.0%
EEM
6
The Problem with Emerging Market ETFs
The iShares MSCI Emerging Markets Fund has 2 flaws:
It’s
BIG*
and it’s
DUMB**
*37 billion of AUM as of 9/28/12
**It’s market-cap weighted, it thinks Korea is an
emerging market, it considers businesses based on
where they are HQ’d not on where they do business, etc.
7
Variant Views on Emerging Markets Exposure
EEM Top 5 Markets (9/28/12)
China (16.7%)
South Korea (15.5%)
Brazil (12.6%)
Taiwan (11.1%)
South Africa (7.9%)
8
Variant Views on Emerging Markets Exposure
EEM Top 5 Industries (9/28/12)
Financials (24.3%)
InfoTech (13.9%)
Energy (13.1%)
Materials (11.8%)
Consumer Staples (8.6%)
9
Variant Views on Emerging Markets Exposure
EEM Top 10 Stocks (9/28/12)
Samsung Electronics (Korea/InfoTech)
Taiwan Semiconductor (Taiwan/InfoTech)
China Mobile (China/Telecom)
Gazprom (Russia/Energy)
America Movil (Mexico/Telecom)
China Construction Bank (China/Financials)
Petrobras (Brazil/Energy)
ICBC (China/Financials)
CNOOC (China/Financials)
Hyundai Motor (Korea/Industrials)
10
This report is provided for informational and educational purposes and is not intended to provide tax,
legal, or investment advice. Nothing in the report should be construed as investment advice, an offer to buy
or sell, a solicitation of an offer to buy or sell, or a recommendation regarding any security by Motley Fool
Asset Management, LLC (“MFAM”), or anybody else. MFAM does not guarantee the suitability or potential
value of any particular investment or information source. Investing involves risk, including possible loss of
principal. In particular, investing in emerging market countries involves risks in addition to and greater
than those generally associated with investing in more developed foreign markets, potentially including
inadequate governmental regulation and smaller, less liquid, and more volatile securities markets. Readers
are responsible for determining whether any investment, security or strategy is appropriate or suitable
for them and should consider their own particular situation before making any investment decision.
MFAM, its employees, and its agents will not be liable for any investment decision made, or action taken,
by anyone based upon any material published in this report. MFAM has made no determination that any
recommendation, investment, or strategy mentioned herein is suitable or appropriate for individual readers
based on their investment objectives and financial situation.
Mentions of securities in the report reflect individual analysts’ opinions and are not recommendations of
MFAM. All expressions of opinion are subject to change without notice and do not take into account the
particular investment objectives, financial situation or needs of individual readers. Forward-looking
statements are subject to uncertainties that could cause actual developments and results to differ materially
from the expectations expressed. Neither Tim Hanson, Bill Mann, nor MFAM holds a position in any
security mentioned in this report.