By John Spence
Emerging market equities have underperformed the S&P 500 by a wide margin in 2013. Yet it could be a mistake to abandon developing markets because the asset class can offer diversification and growth for investors patient enough to stick with it.
Emerging markets are known for their booms and busts. This year has certainly been a dud with the iShares MSCI Emerging Markets ETF (EEM) in negative territory while the S&P 500 has gained more than 20%. Also, many emerging market currencies have weakened against the dollar as U.S. interest rates rise.Yet emerging markets are "still a vital asset class" that has delivered outsized annual returns several times over the past two decades, says Tom Yorke, managing director at Oceanic Capital Management. The firm manages the Global Diversified Aggressive portfolio on Covestor, and the strategy holds emerging market ETFs. "Emerging markets are less correlated to U.S. equities, which you want for diversification," he added. "Hopefully everything is going up at the same time but obviously that's not the case. That said, there have been a number of years when emerging market outperformance has been insane and I want to make sure I'm positioned for that with at least some of the portfolio." Investors in emerging markets should be prepared for some ups and downs in the notoriously volatile asset class. The iShares MSCI Emerging Markets ETF (EEM) has a three-year standard deviation of 19.73%, compared with 12.39% for iShares Core S&P 500 ETF (IVV). The emerging market ETF lost nearly half its value in 2008 when the credit crisis struck global markets, but roared back with a gain of about 70% the following year. Before 2008, the developing market fund gained more than 30% in each of the three years leading up to the credit crisis.