ETF Expert

When we look at arbitrary calendar periods such as YTD 2009, we have a tendency to kid ourselves. We can get quite excited… irrationally enthusiastic, if you will.

For example, Vanguard Emerging Markets (VWO) and iShares Emerging Markets (EEM) have gained 35% in less than 6 months. Just 1/2 the year!

Yet how does the same story play out over 3 years? VWO and EEM would have given you a total return of roughly 16%, the vast majority of which would have come from dividend payments; that is, precious little came from the capital appreciation component.

Granted, a 3-year rolling return of 5% annualized growth doesn't sound that bad. Yet when we compare it against our expectations for double-digit appreciation year in, year out? When we consider the risks that we take to achieve just 5%? When the emerging markets can easily move up or down by 5% in a single day?

The world seems brighter when we examine a 5-year picture for iShares Emerging Markets (EEM)… back when the share price was $15.86. Even after a monstrous '08 bear that slit the throats of emerging market investors, today's closing price of $31.59 represents more than 100% in total return. 

With the power of compounding, of course, one is roughly looking at a 15% annualized gain across 5 years. Still, going forward, how realistic is 15% compounded growth from your emerging market investments? With emerging markets already becoming more developed and more influential by the week, can we truly expect these regions to produce such tantalizing results in the future?

For a true emerging market enthusiast, you might take heart from 30-year rolling return data. For instance, 1925-1954, which included the Great Depression, averaged 10.2% per year for the U.S. stock market. In other words, if emerging markets are similar to "the way we were" circa the GD and WWII, there's every reason to believe that double-digit annualized growth will indeed grace the emerging equity markets in the years ahead.

The question that I have for the buy-n-hold believers  is, "Do you really have to roll with the brutal bearish punches?" Even a simple plan to buy and sell on the 200-day moving average of iShares Emerging Markets (EEM) provided a better total return than the 100% described earlier.

True, you would have missed the phenomenal 35% YTD gains in 2009. And yes, you'd have sold a few times when a sell signal misled.

Yet, by missing the bulk of the bearish fall from a price point of $47 down to $22, one would have optimized the rise from $15.86 in 2004. Selling early in 2008 put the 200-day advocate at an approximate 5-year total return of 180%. (Sometimes, a simple plan to sell can work, Mr. Bogle.)

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", via podcast or on your iPod.

Disclosure Statement: ETF Expert is a web log ("blog") thatmakes 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.