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Emerging-Market Funds Are Not the Problem

Stocks in this article: EEM SPY VEIEX MS

That these things have not occurred could be thought of as unintended consequences -- positive ones. Where the policies are unprecedented it is logical to expect that there could be other unintended consequences, some of which may be positive. But there will also be negative consequences, and the long-term under-performance of emerging market equities could be one of them.

In part, Authers is making a "tail wagging the dog" argument where the smaller thing is moving the bigger thing. However, the asset prices are telling a different and much longer-term story.

Authers is 100% correct that emerging-market investing should be about patience, and the easier tradability of ETFs could be contributing to the short-term volatility -- which is not the same thing as saying ETFs are causing short-term volatility.

However, there seemed to be less concern when the volatility was all to the upside, when EEM rallied by 385% in a four-and-a-half-year period ending in late 2007 and the fund was widely praised for the very thing Authers condemns -- easier access to the space.

Circling back to the idea of patience, investors either have it or they don't. Emerging markets in general have had other multi-year periods where they lagged domestic markets.

In its first five years of trading the Vanguard Emerging Markets Stock Index Fund (VEIEX) was down 2% compared to more than a 150% gain for the S&P 500, according to Yahoo Finance. EEM didn't start trading until 2003, VEIEX serves as a benchmark proxy for periods predating EEM.

The pattern of emerging markets lagging for years then leading for years is likely to continue, which underscores the need for patience.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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