How to Capitalize on Emerging Market Trends

May 2, 2017

Emerging markets have been one of the best performing areas in 2017, up 12.5% for the first quarter. Could this be the start of a new trend?

Historically, market trends shift between foreign and domestic markets, including emerging markets, as FundX Chief Investment Officer Jason Browne explained on CNBC’s Squawk Box on April 19, 2017.

Click here to watch.  

These trends can “take a little while, and they go in fits and starts, but they tend to last for years not months,” Jason said, and that gives investors time to buy in.

When emerging markets are in favor, as they were from 2003 to 2007, they can really boost your returns. “Once we see momentum shift toward emerging markets, we’re not afraid to dip our toe in the water or perhaps go all in,” Jason said. “But we’re not quite there yet.”

If you want to capitalize on emerging markets trends, here are a few key things to keep in mind:

1. Rely on a proven strategy

Emerging markets can be volatile, so it helps to have a clear strategy, like our momentum-based Upgrading approach, that can help you determine when to own emerging markets funds and when other funds have better returns.

2. Buy in gradually

Trends build over time, as Jason explained on CNBC, so buy into new strong-performing funds gradually. As emerging market funds began to do well, we added a little exposure to emerging markets ETFs. If these funds continue to do well, we’ll add to these positions; if, on the other hand, emerging markets reverse course, only a part of our portfolio will be affected.

3. Diversify your exposure

Diversify your exposure to emerging markets. Rather than betting on a single emerging country, invest in a fund like iShares MSCI Emerging Markets (EEM) that gives you exposure to a wide range of emerging countries.

If emerging markets funds are too risky, you can get some emerging market exposure through more broadly diversified global or international funds. Oakmark International (OAKIX) or Dodge and Cox Global (DODWX) both have had strong recent returns, and these funds have 7-10% in emerging markets.

4. Take smaller positions in riskier funds

Taking smaller positions in more concentrated stock funds may help limit the damage if one of these funds suddenly drops. We might invest 10% in a broadly diversified fund, but just 5% in an emerging market fund.

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