Value Ideas and Dividends in Emerging Markets

Value Ideas and Dividends in Emerging Markets

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some seemingly undervalued companies operating in emerging markets to your portfolio but don't have the time or expertise to hand-pick a few, the iShares MSCI Emerging Markets Value ETF could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The iShares ETF's expense ratio -- its annual fee -- is a relatively low 0.49%, and it recently yielded around 3%. The ETF is very small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF is too new to have a sufficient track record to assess. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why foreign companies?
It's a smart idea to diversify your holdings not only by market size and industry, but also geographically. If the U.S. economy stalls or slides, other economies may still be performing well and could help offset losses in your portfolio. Many of the companies in this ETF are quite large and pay dividends. That should be welcome, too, as dividends can be quite powerful. Internationally reaped ones can be a little more complicated than domestic ones, though. Finally, companies operating in emerging markets are able to enjoy faster growth as the local economies develop.

More than a handful of emerging-market-based companies had lackluster or poor performances over the past year -- but that's often a contributing factor to a stock's being undervalued.

Sasol gained just 5%. The South-Africa-based energy and chemical giant sports a dividend yield recently near 5%. Instead of being an ordinary explorer or refiner of oil, it specializes in coal-to-liquid technology and gas-to-liquid technology, producing liquid fuels such as diesel. With a forward P/E ratio around 8 and well below its five-year average of 13, the stock seems attractively priced. Sasol's geographic diversification spreads its risks around, but it also faces some challenges, such as the fact that a big chunk of its workforce carries HIV.

America Movil lost 17% -- and recently yielded 1.6%. The Mexico-based wireless telecom specialist has, in the recent past, helped propel Carlos Slim ahead of Warren Buffett and Bill Gates as the world's richest man. The company has taken on significant debt building its business, and it is now threatened by regulations aimed at dominant companies. In the U.S., its pay-as-you-go TracFone service is growing, too, with more than 23 million subscribers.

Brazil-based Vale sank 33%, though the world's largest iron-ore concern offers a tempting dividend yield recently near 6%. Its forward P/E near 6 is less than half of its five-year average of 14, and the stock looks undervalued to many, though some aren't convinced. Vale has been tackling soft demand by cutting its costs significantly. The company's CEO is talking of restrained and disciplined capital spending.

Brazilian oil giant Petrobras plunged 37%, burdened by significant debt. Bulls have been heartened by rising production numbers as some offshore rigs are brought back into service, and some are hopeful that solid car sales in Brazil will boost Petrobras' business. But others point out the Brazilian government's heavy influence on the company's fortunes.

The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

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Longtime Fool contributor Selena Maranjian. whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool recommends Petrobras and Sasol and owns shares of Vale. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published