Investing in Emerging Markets

The term “Emerging Markets” was coined in 1981 by the International Finance Corporation as a marketing term to help make the case for foreign investors investing in developing economies. Today, emerging markets make up roughly 10-12% of the global market capitalization representing around 25 countries including China, Taiwan, India, South Korea, and, until recently, Russia.
Characteristics like high economic growth expectations and attractive valuations compel some investors to overweight emerging markets in their portfolios, but there are some often overlooked facts, costs, and risks that should be carefully considered.
Referenced in this video:
Establishing ‘Emerging Markets’: www.ifc.org/wps/wcm/connect/c...
Is Economic Growth Good for Investors? : csinvesting.org/wp-content/upl...
Earnings Growth: The Two Percent Dilution: www.researchaffiliates.com/co...
Foreign Speculators and Emerging Equity Markets: faculty.fuqua.duke.edu/~charv...
Equity Market Liberalization in Emerging Markets: public.kenan-flagler.unc.edu/...
What Segments Equity Markets?:www8.gsb.columbia.edu/sites/f...
Drivers of Expected Returns in International Markets:faculty.fuqua.duke.edu/~charv...
Conditional Skewness in Asset Pricing Tests: faculty.fuqua.duke.edu/~charv...
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[@mriegger]

Perfect hairline that is the envy of every man over the age of 25. Still shaves his head.

[@10010x0x0x01101XX0X1]

just watched a few of your videos. you are one of the only wealth manager on youtube who isn't a complete bullshit artist. everything you say about index funds, income investing, financial advisors, is totally right.

[@BenFelixCSI]

Wow, thanks. “Not complete bullshit” might be my favourite compliment.

[@victorgbs]

Missed your videos, Ben. Keep up the good work. I always link them when I need evidence based help in favor of index investing.

[@juliankilian1340]

One of the most professional finance KZbins, thank you !

[@JZ1917]

Thank you for making these. I learn a ton directly (in this case for example about the negative skewness of emerging markets) and about topics I need to learn more about simply to fully grasp Ben's sharing (like the double tax withholding). Thank you!

[@rod_-0918]

Im glad you are back!!!! Best CFA in KZbin!! 🔥

[@SeanSurajJeremiah]

Please keep producing content like this Ben. It's jammed packed with valuable information, concepts and citations for econs plebs like myself.

[@Zycoreination]

Just found this channel from a 4yo index bond video, subscribed, great content 👍

[@undercoverdudes]

I'm a big fan of having a market cap weighted amount of EM in my portfolio, the lack of correlation between it and companies from developed nations is a great differentiator

[@f3wbs]

No way! The guy I used to watch to get into CA!

[@alankoslowski9473]

Yes, I think the relatively low correlation to developed markets provides beneficial diversification. I'm a little overweight in EM, so I might reduce my allocation to global market cap weight.

[@bingo567890]

@@alankoslowski9473 what is your % to EM? Mind to share? Because idk what your overweight meaning is. And id love to know. I’ve been DCA VT but lately and after this video I feel like I should allocate more % to USA because open integrated market and strong capitalism.

[@alankoslowski9473]

@@bingo567890 I have about 20% EM. Global EM market cap is about 15%, so I'm only a little overweight EM. That's probably fine, and I'm just being obsessive-compulsive.

[@mddeloarhossen788]

@@alankoslowski9473 00p0ppl0000p0ppl000

[@MillennialsWithMoney]

I’ve typically invested in ETFs tracking emerging economies mainly through looking at the underlying assets (stocks). I still believe this is a good guideline but appreciate that there is a much greater level of depth in things to take into account after watching this video.

[@anaestereo810]

YES! the legend is back!

[@singularity7968]

Thank you for providing great information without any clickbait bs. You are a rare breed.

[@srikanthramanan]

Appreciate Ben for your outstanding content that's backed by statistical data and empirical evidence instead of personal opinions. One of the most underrated and underappreciated amongst finfluencers.

[@cryengine_x]

ehh, he acts like if its in a paper its true. thats obviously false as we see from climate change for example, with millions of fraudulent papers existing, as well as masks etc, basically anything liberals support. that said, sure theres room for countless approaches on yt, and surely theres value to be found here, although i prefer rob berger and markos whiteboard finance.

[@srikanthramanan]

@@cryengine_x I concur, not all papers or data sources are legit. However, financial markets and economy aren't science. They are more like a social science that study on human behavior. Things aren't as clear cut like E=mc2 in the world of science. What I like about Ben is that he quotes his data/research sources instead of just providing personal opinions like many other finfluencers which could be very subjective and biased.

[@Mzert805]

Best financial youtuber.

[@debbh274]

Request you to make more videos. You have great knowledge and is a great help to us.

[@davidchen5661]

Thank you. Always good videos

[@ItsMe-ky1km]

glad to have you back

[@xordoom8467]

Miss your videos, thank you for sharing...

[@misterr2359]

I'm a global investor from Brazil with a passive investing strategy with focus on value. That said, I do not have any restrictions investing in other countries and I do have some benefits in doing so (taxes are lower if I sell shares, per example). My strategy is to invest 20%-25% in EM (currently at 20%), because in doing so I decrease the cambial risk because I live in a EM country. This video helps a lot, thank you very much.

[@doneflounder7086]

Tamo junto

[@doneflounder7086]

Benefits in investing in other countries? Taxes for investments on Brazil are lower than in the US(Main market small Brazilian investors can access)

[@jsauerfinancial8257]

What’s your favourite Brazilian stock?

[@misterr2359]

@@jsauerfinancial8257 I don’t invest in individual companies, but I really like Weg, a family company that is super good in what it does. There are other excellent ones also.

[@mikeg9b]

I was overweight emerging markets since around 2005 because of a few of Burton Malkiel's books that I read. It had a few good years, but after that, it severely under-performed U.S. stocks. Oh well... It was after reading Burton Malkiel that I went 100% with index funds and that was the best investment decision of my life. So, I forgive any bad advice that I got from him.

[@raylo996]

A random walk down wallstreet killed my dream of being an active investor lol

[@thejoostvankempen]

Thanks for yet another insightfull video. It’s a bit harder to follow now the graphics are missing. Hope they will return in future video’s!

[@roygarrido]

Thanks for another great video.

[@TheBlackMage3]

Great points! This is why I don't like investing in emerging markets. I don't think investors can easily quantify the expropriation risk.

[@LundeMaja]

What I love about Ben is that his message is simple, consistent and he can continually provide evidence to support his claim! If you've watched one of his videos, or listened to one of his podcasts, you know what the message is!

[@DekarNL]

I underweight EM a little bit. The higher costs and withholding tax is not the main reason, but I never thought the differences would be so large. Thanks!

[@arthurmorgan7729]

DFA just released Emerging Markets Value and Emerging Markets Profitability ETFs. I’m thinking of getting some EM exposure through those two.

[@laurentrigoreau5777]

Always great job ben, emphasized strong academic studies.

[@laurentrigoreau5777]

All these Fishing spams…so tiring…

[@OfficialNikeBMX]

As always, excellent content. Would love to see a video on TIPS and TIPS etf’s. Think that would be very pertinent for the current inflationary environment

[@jmc8076]

He’s an advisor in Canada but could prob do a video on them and Canada’s equiv.

[@jessenortman8111]

Great insight!

[@redoxhydra]

Thank you Ben for the insight. One must not naively overweight emerging markets for higher expected returns.

[@alankoslowski9473]

Yes, I'm a little overweight EM. After watching this I'm inclined to reduce it to global market cap weight.

[@flammmenspeeryt9184]

A new video from Ben! Lets go! You are my favorite youtuber 😁

[@takedashingjen4402]

Hell yeah, thank you for this video. I comment before watching. Experts in Germany often call investing in EM factor investing because of political risk. My portfolio hast around 20% EM. Lets see if this is a good idea (proceeds to watch video)

[@thomasmuller1850]

I guess, that you are considering EM value now?

[@takedashingjen4402]

@@thomasmuller1850 it would be a possibility to own 10% em and 10% em value, that is true. Will sleep a few weeks about that. Long term Portfolios will not fail by taking things slowly

[@alankoslowski9473]

I have about the same EM allocation. After watching this I'm inclined to reduce it to about 15%.

[@bingo567890]

@@alankoslowski9473 so u are changing from 20% to 15%?

[@alankoslowski9473]

@@bingo567890 Probably gradually. I won't sell EM since I'd have to take a loss, but won't buy anymore, at least not until it drops below 15% of my assets.

[@TuEIite]

Great work ! Thanks for sharing.

[@tuams]

Such a treasure trove of research backed information. Thank you for increasing my understanding of how things work, even though I don't understand everything.

[@janr1805]

I really enjoyed the podcast and I also enjoyed this episode. Its great to have a short version with all none of the research results missing, especially when you hesitated to share a podcast. I quit emerging markets about a year ago, mostly because I found them hard to track and because of taxes. The best ETFs have a tracking error of zero or 10 basis points. On the other hand here in Germany you can track the S&P 500 for less cost and it has a negative tracking error of 50 basis points. I rather beat the S&P 500 by 0,5 % and have less volatility and less skewness than the additional return from EM. Great video Ben!

[@ichdu7391]

70/30 und fertig ist die Laube. xD

[@janr1805]

@@ichdu7391 Thomas, bist du es?

[@NicheTrading]

Hey Ben, Your video are a great piece of information, I took civil engineering and want to get better at portfolio management etc. Would you say CSI (Canadian security institute) is a good resource to learn from? Do you have any better recommendations? Thanks!

[@dumolollen7676]

While pursuing my research on Foreign Portfolio investors, as part of M. Phil degree i observed the high volatility created by FPI in the Indian stock markets as they r called popularly Hot Money

[@adonisds]

Thanks for the video, Ben. In another video you said you a re in favor of a substantial home bias. What would you say is the recommended home bias for someone who lives in an emerging market like Brazil?

[@chandraprakashagarwal427]

Top knowledge

[@edwardmauer7442]

Great video as always Ben. How about a video on the volatility premium? How options seem to be persistently overpriced, ie implied volatility tends to overstate actual. Is this a possible factor like value or size? Seems like something right up your alley.

[@Chris-tp1rs]

Hi Ben. Do you by chance provide written transcripts of your KZbin videos?

[@angelobucchi3324]

Hi Ben, I would like to ask you what do you think about Ray Dalio's All Weather portfolio

[@samsonsoturian6013]

One of the problems with "emerging markets" is the definition is extremely arbitrary and skewed to include countries with low costs of living regardless of their actual development.

[@niranmojo]

Proud holder of VIU and VEE etf

[@mycolebrown4719]

Great video! Will you ever do one about regional ETFs or regional banks ETFs?

[@AP-cc5ym]

I… wow… as someone holding XEC in a TFSA I’ve never seen a youtube finance video more specific to me.

[@joshuamays854]

Thanks, Ben! Would AVUS be the same as a total market fund for the purposes of starting a portfolio with total market exposure? Or should AVUS not be used as my core total market approach?

[@AmanBhimani]

Is the withholding tax issue in Canada also present for something like XUU which is a Canadian listed ETF, but holds other US based ETFs?

[@mihailomaksa2184]

What about frontier markets, are they worth investing in?

[@elpablo891]

Nice!

[@anonymoustruth4038]

Ben, I am curious; Do these extra risks and taxes change the formula for CAPM, or are they just included in the beta? Thanks

[@BenFelixCSI]

One of the papers I mentioned proposed a new asset pricing model that includes skewness. However, I am not sure how that model performs compared to the five factor model.

[@xaviercouture-brochu5807]

Would you use HXEM to avoid taxes on dividend?

[@RJGPG]

A+ content as always

[@Steven-wq8tx]

About 5.4% of my portfolio is in emerging markets!

[@thomasmuller1850]

That's the confirmation bias I need to not overweight Emerging Markets. 10:40 It would be interesting to see, how well Emerging markets value would have performed after 1900, especially during 1945 to 1949.

[@chris-pj7rk]

Investing in stocks is not like putting your money in a savings account that pays 10% annualy. Returns will fluctuate from year to year, some times dramatically. The 10% return is only an average of some bang up years and some gut wrenching years.

[@havaneseday]

Im planning/hoping/crying/wishing for real returns of 4-5% 10%?! That would be tits.

[@FatherGapon-gw6yo]

No way

[@shun2240]

I actually underweight EM, I am overweight developed value, mainly because I live in EM and work in tech, so it just makes sense to diversify away from EM and tech

[@NiRuKa]

What about inflation? Typically emerging markets have higher inflation than developed markets which would also eat into the returns, right?

[@muffemod]

I was here yo!

[@naidnarnya9448]

Two videos within just a couple weeks of each other?? Who knew Christmas was meant to come early this year. A few questions for you - will Dimensional be replacing Avantis in the model portfolio? And do you know when Dimensional will be coming out with an AVES competitor as well? Which also makes me curious to know - why is AVES and what Dimensional is coming out with just EM value? Does size not show up in EM?

[@alankoslowski9473]

So far DFA and Avantis seem very similar. If you compare returns of their all cap funds for US, international, and EM segments they're almost identical. I think Avantis might have a slight edge, but I don't think it's statistically significant.

[@naidnarnya9448]

@@alankoslowski9473 eh, the problem is the historicals aren’t nearly long enough yet to determine which is better, especially considering how out of favor value has been for the past two decades which is DFA’s number one factor. Not sure if you’re active on the RR forum but basically Ben and a few others have discussed that DFA is more value-ey than Avantis, in that they start off looking at book value and then other factors, whereas Avantis looks at value and profitability jointly. Also DFA has greater microcap exposure too which have higher expected returns within SCV.

[@jbdmb]

How might the investing/wealth creation paradigm change in the forthcoming decades considering the distortion of the financial markets through monetary policy and exchanges implementing kill switches when markets tumble too much?

[@dairysmoreta6108]

His back! 🥰

[@SKITTLELA]

What about Ben's back? How can you see it if he seems to always be facing the camera?

[@jimbojimbo6873]

Bangladesh needs to open up its stock market the growth rates are insane

[@josealvaradotorre6870]

Hey! What happened to the EDM intro? Zi-zo-zao!

[@emrahgedik1727]

Would it matter between "İshares core MSCİ emerging" and "Vanguard FTSE Emerging"? Have looked that inner is almost the same. OOk with country distribution. İDoes there's something advantage that I don't know? I have noticed that with "Vanguard emerging", for example, no zuis korea "samsung" share is included.. Maybe that's a small difference? Thank you so much.

[@PipoOriginal]

MSCI and FTSE are two different indexes that classify some countries as developed/emerging differently South Korea is classified as developed by FTSE, but as emerging by MSCI, that's why you see the difference. You can use either of those, but if it's best to stay in the same index in developed and emerging markets to not lose/overweight any countries

[@awsc5675]

EM stocks have performed badly since mid of last year 2021 until now, MSCI index is falling and I can't see a break even point or positive for the stocks in this year 2022.

[@implied321]

Hi Ben I have an ideal about future video. Something about commodities as an asset class?

[@BenFelixCSI]

I touch on that in my next video.

[@implied321]

@@BenFelixCSI Great thanks. Really like what you do. Greetings from a risk quant

[@implied321]

@@BenFelixCSI Ben one quick question if I may. Has Famma prove that all market's are efficient? Example Forex market or even commodities?

[@whatarefriends4]

I listen to the Rational Reminder podcast

[@BenFelixCSI]

Awesome. Thanks!

[@tacocruiser4238]

The inverse correlation between economic growth and stock valuations actually makes me bullish on Chinese stocks. Chinese economic growth has slowed significantly and continues to slow down into the future.

[@se2103]

You had me at, Skewness. 😆

[@se2103]

?

[@Austden]

I invest in FRDM for many of the reasons listed here. The markets are better integrated and have a lower cost of capital, it excludes SOEs, has lower lower foreign withholding tax and a much lower coskewness. Haven’t had to worry about the crap China has pulled or the war by Russia.

[@MarcoP1919]

But then how come that the US GDP grew a lot and also stock market returns were high?

[@veejayroth]

Don't accumulating ETFs kinda solve the dividend taxation issue?

[@orfeoassiti6669]

It depends on where you live, in Switzerland you get taxed even if the dividends are in an accumulating ETF

[@ag5605]

If you ask me Taiwan and South Korea should bei considered as developed Countries.

[@samsonsoturian6013]

The category is based on simple dollar values, not actual development. It doesn't matter that cost of living is dirt cheap in Russia and really expensive in Greece, the dollars per capita is higher in Greece. This is why the index returns seem random.

[@tchuloguzman432]

Lately I found this when I was looking for Vietnam etf the growth is not there even the country growing fast

[@benfelix1hourago561]

$ ༒1615 -436 $-0796 📈

[@Unknown-jt1jo]

Too bad you operate in Canada. I wish I could hire you as my portfolio manager!

[@jasonmiddleweek1509]

The Russian market deletion was quite a left side event. I think I lost .2 percent of my life savings forever due to that pointless war.

[@samsonsoturian6013]

Get drafted.

[@jnjpascale1]

Great content. You just need to simplify the explanation of it. Maybe an editor would help. At such a fast pace with often high level concepts, you lose too many. I have studied investments for many years and even with my familiarity you lose me too often. Communication isn’t communicating unless it really communicates, and that takes understanding. But still love the value you being!

[@TXLionHeart]

Remember, guys, expected return = discount rate.

[@chandraprakashagarwal427]

Is China developed market

[@dhess34]

I would watch Ben Felix read a phonebook.

[@genesisprospero3652]

AVES etf anyone?

[@carlt1898]

How much of my ETF portfolio should I allocate to Emerging Markets?? I have a 100% stock (growth, no bonds) ETF portfolio.

[@takedashingjen4402]

It would be a good start to abandon growth for Value at the baseline...

[@carlt1898]

@@takedashingjen4402 I have market cap weighted indexes and a value ETF which is 15%. I meant growth as in growth vs defensive assets. I.e. no bond ETFs.

[@M43782]

"The MSCI Emerging Markets(EM) Index was launched in 1988 including 10 countries with a weight of about 0.9% in the MSCI ACWI Index. Currently, it captures 24 countries across the globe and has a weight of 12% in the MSCI ACWI Index."

[@stefanbatory3632]

Couldn't happen today. Putin: hold my beer.

[@jmc8076]

Overused phrase in comment. VP is not a human being who should be glorified.

[@afridgetoofar1818]

I'll continue to stick with a US only total market portfolio

[@alankoslowski9473]

Not a bad idea, though global diversification does reduce volatility.

[@cesaresp101]

Negative skewness is precisely why selling puts is so profitable right?

[@samsonsoturian6013]

Stock options are a zero sum game.

[@sleepless2541]

@@samsonsoturian6013 so is the stock market

[@sleepless2541]

you're bleeding money for the most part, but you'd be rich if collapse happened in EMs making your puts worth a lot, correct me if im wrong here not a derivative expert

[@samsonsoturian6013]

@Sleepless it literally isn't. The thing about options is that assuming an efficient market the prices of all options reflects the probability of stuff happening. While the price of a share reflects the Federal interest rate plus a premium equal to risk taken.

[@sleepless2541]

@@samsonsoturian6013 read the arithmetic of active management by william f. sharpe, it is zero sum in the sense that for everyone making money in the stock market there has to be another person losing money, the net result of all trades between all market participants is the return of the market itself

[@AC-ge2tr]

Thanks for always pushing out evidence

[@samsonsoturian6013]

In hindsight, it appears that Chinese stocks reflect economics more than their GDP numbers.

[@khafreahmose8768]

Investing in Turkey brought me here.

[@grigorirasputin425]

You should only invest in Turkey at the end of November

[@robyn_southafrica]

​@@grigorirasputin425as someone who's new to the market, why is that?

[@SS-sy4uu]

If you are a citizen of an emerging market economy, you have no choice but to be overweighted in emerging markets…

[@PaulJWells]

7000EUR lost on a predominantly-Russian fund. I'll survive, but it was disappointing because I kind of thought I was helping Russia to integrate into Europe.

[@mikehawk4856]

I am only in emerging markets. The us stock market is just like japan’s in the 1980s but nobody will admit it. When the bubble pops, anything outside the USA will skyrocket

[@SpaceTravel1776]

I am only in emerging markets too. I have 50% of assets in North Korea. I see it as a value play in Warren Buffet style.

[@mikehawk4856]

@@SpaceTravel1776 I also invested in a North Korean missile company. Good plan my friend

[@SpaceTravel1776]

@@mikehawk4856 We are smart, handsome, and have excellent taste in wine. Cheers!

[@chandraprakashagarwal427]

India is very high priced

[@candyboober]

started watching you recently and just confirmed "we are sure the chart will go right (->) direction"

[@Ikbeneengeit]

Oh yeah talk covariance to me

[@anoniemedude2794]

Ben, is it possible for you to speak a little bit slower? As a non-native speaker it's sometimes difficult to understand everything. Especially, because the high densitity of information. 😅 And yes, I tried 0.75 playback speed, but it doesn't sound natural.

[@palanski]

His target audience is largely made of native speakers, I'd imagine. The speed with which he speaks is standard. Can't cater to everyone. Luckily, that playback speed is there!

[@Klayhamn]

You can always lower the speed of the video

[@azhp42069]

Using closed captioning can help

[@Klayhamn]

@@azhp42069 and who would sit and caption it..? You?

[@surfingerik69]

zet de ondertiteling aan, helpt mij een berg om het toch nog te kunnen volgen. want het kan inderdaad wat snel gaan

[@muffemod]

Russia got delisted yo!

[@wildist]

Sometimes I wonder if Ben cherry picks data or is overly influenced to suit his employer's investing philosophy (who subsidise this channel).

[@Elkunas]

Where did he cherry pick?

[@alankoslowski9473]

What do you mean? What do think his employer's philosophy is?

[@jmc8076]

You’re free to DYOR and put a comment debating his data with cited sources used by you. We all have biases.

[@SharonOnTheNet]

I will only invest in democracies. There are values that are greater than profits.

[@alisav8394]

For some countries dictatorship, kingdom or tribal hierarchy works better than a democracy. The world is bigger and much more diverse than US and Europe.

[@sven5542]

So, Turkey?

[@jonathanalvarez3875]

That’s a very biased view of the world. For some countries, they are not ready for democracy yet.

[@zohahs5276]

Show me your portfolio. You bash every single investing option with facts and data and studies nice one.