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Now's the Time to Buy Emerging Market ETFs as a Low-Valuation Play


Though this sector has lagged other markets, it has the potential for a solid comeback.

MINYANVILLE ORIGINAL In my book Winning With ETF Strategies (Minyanville/FT Press, 2012) there are graphs from Guggenheim Funds that shows how stocks, in this case the S&P 500 Index (INDEXSP:.INX), performed against bonds in six 10-year periods. In those periods, stocks outperformed bonds in every decade except the last one, the decade of 2000-2009. Stocks are expected to outperform since they have more risk. Bonds are relatively safer than stocks. With stocks there are no guaranteed prices, and stocks sell at whatever price people will pay for them. Bonds are different, and if they are held to maturity, and the issuing company has the cash, the bonds will be paid off at par.

In the last decade bonds outperformed stocks – no surprise because almost everything outperformed stocks, including Treasury bonds, silver, gold -- even Treasury bills outperformed stocks. That decade is an inverted performance for stocks, and will not likely be repeated. In the past 100 years there have been short periods when bonds outperformed stocks, but over longer periods stocks have outperformed.

In Winning with ETF Strategies it is pointed out that investors should determine at what point in a cycle the market is in and where it might be heading. Markets move in cycles, which take years to complete. Using the Dow Jones Industrial Average (INDEXDJX:.DJI) as a barometer, over the past 113 years there were more bear market years than bull market years. Bull markets lasted an average of 10 years, and bear markets lasted an average of 18 years. The bear years were more like sideways markets than big down markets. In bear/sideways years investors and traders are pessimistic and cling to negative news and generally hate the market, while trying to profit by its moves. In bull market years caution is generally thrown to the wind, and risk profiles are downplayed, while investors and traders (myself included) think how smart they are. Meaning they are making money.

Definitely we are in a bear/sideways cycle, and have been for about 12 years. However, there is hope, and the market feels more like a market bottom than the a market that has about doubled from its lows.

Stocks should do better than bonds this decade, and should do better than many other asset classes. Studies show that asset-class exposure is the most important determinate in how a portfolio will perform. You have to determine the asset class that will outperform, and also determine the amount of risk you can assume, both financially and emotionally.

Even though stocks performed badly this past decade, certain slices of the market, such as small-cap stocks, and stocks in the energy sector and the health-care sector, performed well. Although asset class buying is not the same as buying the general market, such as buying the S&P 500 or the Dow Jones Industrial Average, that can be the best way to invest, if you pick the right sectors.
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