Buy These 4 Emerging Market Stocks Instead of an ETF

It’s no secret that US stocks have done exceptionally well over the past 11 years before the bull run came to an end.

Although Covid-19 stopped global markets in their tracks, some markets have fared better than others.

That has led the US stock market to outperform yet again versus global peers since a bottom was reached on 23 March. For many investors, this has meant perhaps looking towards cheaper stocks in places such as emerging markets.

However, as I’ve written about previously, I have issues with ETFs that track specific stock indices. In the case of emerging markets, it’s no different.

Keeping that in mind, here’s why investors should buy these four stocks instead of an emerging market (EM) ETF.

Asia rules emerging markets

For any investor who wasn’t already aware, Asia makes up the bulk of the benchmark EM index: the MSCI Emerging Markets Index.

Just four Asian countries – China, Taiwan, South Korea and India – together make up a combined 72% of the MSCI EM index.

What’s more astounding is how bad returns have been. Given emerging markets are considered high-growth (but also high-risk) markets, you’d expect the returns from the index to be positive over the medium to long term.

However, that’s not the case. The MSCI EM Index’s net returns (as of 30 April 2020) over five years were actually negative at –0.1%. Even worse, over 10 years the return has been a measly 1.45%.

So what should investors do if they want to tap into these exciting growth stories? It, of course, means investing in the individual winning stocks.

Tech rules the roost

Unsurprisingly, the four biggest stock components of the index are the ones investors should be buying. Two are Chinese, one is Taiwanese and one is Korean.

They are the region’s tech giants; Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988), Tencent Holdings Ltd (SEHK: 700), Taiwan Semiconductor Manufacturing Co Ltd (TWSE: 2330) (NYSE: TSM) – also known as TSMC – and Samsung Electronics Co Ltd (KRX: 5930).

They have been the region’s biggest winners over the past decade and the four have a combined weighting of 21.27% in the MSCI EM Index.

And their returns have been so much better. Take TSMC for example. The semiconductor chip foundry giant’s shares have returned 390% over the past 10 years. Tencent shares have done even better – returning an unbelievable 1,350% over the past decade.

Add to the winners

For long-term investors, diversification shouldn’t become “diworsification” which is what investing in an emerging market ETF would become. That’s because (surprise, surprise) you would be forced to have exposure to some really terrible stocks, such as Chinese state-owned banks.

We should remember that, as long-term investors, some of our biggest gains will come from adding to our winners and holding on to them for decades.

For those of us wishing to gain exposure to emerging markets, these four stocks are definitely a good place to start.