While I do like emerging markets (EEM), investors should be cognizant of the risks associated with the asset class. The biggest one is simply volatility. While the volatility of emerging market stocks and bonds is converging with that of developed markets, emerging markets are still, for now, more volatile. Over the past year, the MSCI World developed market index (EFA) has had a volatility of around 13%, versus 19% for the comparable emerging markets index. In other words, if markets head south, emerging markets (EEM) are likely to feel the pain.
Market Realist – The graph above shows the 30-day volatility (VXX) for both emerging markets (EEM)(VWO) and the S&P 500 (SPY)(IVV). As you can see, emerging markets are more volatile than their U.S. counterparts. The 30-day volatility of emerging markets stands at 17.1 compared to 10 for the S&P 500. Both values are quite low currently. This means that both indexes may have factored in very little of what could happen in the next 30 days. A deterioration of the situation in the Middle East or poor economic numbers could bring down both markets.
Please read the next and final part of this series to learn how specific emerging markets have done this year.