ETF Expert

Through the first 1/3 of the year, there's been a stark difference between the performance of popular developed world indexes and the performance of the emerging market indexes. Simply stated, the emerging baskets have appreciated substantially whereas the developed regions are still trying to pull even in 2009.

Early in 2008, "decoupling" advocates suggested that the Unites States could struggle in a recession, while the seemingly healthier economies around the world were less dependent on the world's largest economy. As the financial crisis deepened and as the commodity bubble burst, however, it quickly became clear that the growth of the emerging world was still very much tied to the U.S. consumer and to U.S.-based businesses.

Yet there now appears to be glimmers of hope in the U.S. economy. Business orders in February, March and April of '09 have picked up after declining throughout the majority of 2008. The financial system — albeit far from fixed — is showing signs of stabilizing. Even American sentiment has picked up as evidenced by a jump in the Consumer Confidence Index. All told, this probably gives a lot of folks reason to believe that the U.S. economy, while far from healthy, isn't going to suffer through an endless Great Depression II.

This is pretty much all the emerging world needs from the U.S and #2 Japan. Or for that matter, it may be all that is needed from "old Europe." Specifically, the developed world can grow at an anemic pace, or even show flatness, and that may just be enough for the emerging world to do its "thing."

So what is the emerging market "thing?" Well, for any business to succeed, it needs inexpensive sources of labor, easy access to capital, positive cash flow, a believable path for ongoing growth and sustainability in tough times (like these).

Key emerging markets like China and Brazil have revenue surpluses at home, trade surpluses with countries abroad and they're among the lowest cost providers of labor. In effect, they have been trading their labor and their commodity production for U.S. treasuries, which is a part of the reason that the world has functioned as well as it has over the last 10-15 years.

So can the emerging nations truly decouple from the developed world? Their economies can't… and probably wouldn't be able to exclude Japan, old Europe or the U.S. for decades.

What the emerging countries can do, however, is help to ensure the developed world is functioning just enough. (Why else would the Chinese buy U.S. treasury debt!!!) In fact, old school countries don't have thrive… but only grow at a slow, slow pace, for emerging market stocks and bonds to continue on an impressive path.

How might you profit from the likelihood that emerging markets will outperform? You might want to garner the lowest cost exposure in Vanguard Emerging Market (VWO). China and Brazil may be the heavy hitters in the basket, but you're also going to get a dose of the Asian tigers (Korea, Taiwan, Singapore). Ironically, the Asian tigers are every bit as developed as Australia, but hey… it's the developed world ETF providers that are making the naming distinctions.

Indeed, there are plenty of risks to owning an emerging market ETF. They suffered more in calendar 2008 than either the U.S. or Japan. Political uncertainty alone can stifle your best laid plans.

Consider buying VWO on weakness (pullbacks) and/or buying in portions… a la "averaging in." And always, always, always have a plan to sell.

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "live" or via podcast or on your iPod.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.