Emma Wall: Hello, and welcome to the Morningstar Series, 'Ask the Expert'. I am Emma Wall, and here with me today is Morningstar Passive Fund Analyst, Caroline Gutman.
Hi, Caroline.
Caroline Gutman: Hi, Emma.
Wall: So, we are here today to talk about emerging markets. It used to be that you could put you money in the four major emerging market economies of Brazil, Russia, India and China, the BRIC nations, and get a pretty nice return over the course of a year, two years, three years, four years, equally from those growing economies, and indeed, the wider emerging markets, but that's no longer the case. Is it?
Gutman: No, and in fact, we've seen over the last few years a real divergence between the individual economies. Whereas 15 years ago, the BRIC really made more sense, but more recently, for example, Russia's economy last year, we saw the equity market fall by about 40%, versus some real growth in India, almost 40% as well. So that's a real disparity between the countries within the BRIC.
Wall: If you are looking at passive funds in order to get exposure to those economies, it used to be as you say 15 years ago, you could have bought a passive fund that perhaps tracked the MSCI Emerging Market Index, but with these emerging markets increasingly becoming diverging markets, how would you play that passively?
Gutman: That's one of the real benefits of passive investing, rather than having to buy a block of emerging market countries, you are able to pick and choose your exposure. So for example, you could pick up the an MSCI India tracking ETF as well as MSCI China tracking ETF and then avoid Brazil and Russia altogether if those are not appropriate for your portfolio.
Wall: I think those two economies in particular have been hit by the oil price falling so significantly, and also by the fact they are just not within their universe, very diverse indexes where increasingly Asian economies are.
Gutman: Definitely, and another factor to really consider is the political risk part. The political risk is still a very much a presence and something that investors need to consider when putting together their portfolio.
Wall: Even though you'll might be reducing your exposure to some of these more problematic countries, that doesn't mean that you shouldn't continue to have a very diverse portfolio because with single country exposure, there are greater risks aren’t there?
Gutman: There definitely are greater risks, and of course, you have to take a close look at the volatility and the underlying index, what the index actually consists of. So, it's still important to be discerning, but you can pick and choose what your portfolio actually consists of.
Wall: Are there any ETFs in particular, you'd like highlight today?
Gutman: Well, I would say, if you are considering emerging market exposure, I personally, with the BRIC – I tend to think steer clear of the B and the R and focus on the I and the C, so an MSCI China tracking ETF or an MSCI India tracking ETF both would be great options.
Wall: Caroline, thank you very much.
Gutman: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
