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This ETF Is The Latest Addition To My Portfolio 💰
It was the best performing equity during the “Lost Decade” of the 2000s.
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Today we’ll be taking a deep dive into my latest addition to my investment portfolio.
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This ETF Is The Latest Addition To My Portfolio
Highlights
EEM provides exposure to 13 emerging nations and outperformed the S&P 500 in the 2000s.
Some of its holdings are concentrated in areas of geopolitical risk.
The ETF is down near 5 year lows. With the USD ripping, is now the time to buy?
EEM is a great candidate for covered calls, can easily earn 2% on your investment every month, not factoring dividends.
What Is EEM?
The iShares MSCI Emerging Markets ETF (EEM) seeks to track the investment results of an index composed of large and mid capitalization emerging market equities. It was created in 2003 and has about $20.3 billion in assets under management. It is used to diversify with international large and mid cap stocks and has 1,244 holdings.
EEM pays a semi-annual dividend yielding about 3.17% and is hovering around the 52 week low of $33.67. EEM trades at a 10.5x P/E multiple and has a beta of 0.72.
Pros
Diversification
EEM provides diversification across 13 emerging nations. A great benefit of ETF investing is that I don’t have to dig deep into 1,000s of stocks from around the globe.
Outperformed The S&P 500 During The 2000s
Emerging markets outperformed the S&P 500 over the 2000s, delivering a CAGR of 9.82% as opposed to -2.75%. Had you been fully invested in U.S. Large Cap companies at the start of the 2000s, you would’ve experienced what is known as a “Lost Decade”— a decade with 0% or fewer returns.
I want to avoid lost decades as much as I can and that can be achieved by diversification into different asset classes and countries. Large caps tend to have more boom and bust cycles due to increased speculation about future returns.
International emerging markets also have more room for growth. Their civilizations are rapidly evolving and are adding e-commerce companies like Jumia in Africa and Zood in areas like Pakistan and Bangladesh. There’s also room for expansion in infrastructure like roads and the adoption of electric cars to name a few. As more and more of the world connect to the Internet, more opportunity will arise as civilization expands.
I was inspired by a recent post on the website The Generalist, highlighting one man's journey into private equity in underrepresented countries. I'll link that here, very worth your time to read.
Five years after Masayoshi Son’s $100 billion fund shook the financial world, Softbank’s venture firm is crumbling. Can it be saved?
Share Price
One last plus to EEM is its low share price. It currently trades in the $35 range and allows me to accumulate more shares than I usually would. I'll be able to take advantage of covered calls soon enough and EEM has an extremely liquid options chain, meaning there are many buyers and sellers at all times. EEM is the 4th most active options chain and I'll have an easier time finding options buyers there than most other stocks.
Cons
Right off the bat I’m not a fan of EEM’s expense fee of 0.68%. It’s higher than the other Vanguard ETFs I hold, but it could be much higher. A $10,000 is subject to $68 of fees which isn’t all that terrible but as time goes on that number will rise. If a lower-fee fund releases that accomplishes the same objectives as EEM, I may consider it.
High Exposure To China
I consider allocating ~30% of the ETF to China a negative for EEM. While China has been an extremely fast growing economy for a couple decades, it is consistently at the center of political distress and is unpredictable when it comes to government rules. In the past few years we’ve had:
Rolling COVID lockdowns
Laws proposed to stop companies from tracking user data that is crucial to marketers, instead China would be the only ones with access to user data
40.1% Social Security Tax imposed on companies (Compared to U.S. 13.65%)
A law enacted that when the Chinese Government owns 1% or more of a business, they can decide the board members
The threat of an invasion of Taiwan (more on that later)
Several Chinese companies were proponentes of fraud during the 2000s and the movie The China Hustle does a phenomenal job of uncovering the fraud.
I know I just laid out a ton of negatives about Chinese investing but they are still the world’s fastest growing economy. They’re projected to pass the U.S. between the years 2042-2047, and are the manufacturing center of the world. The positives of the other countries in the ETF outweigh the negatives in my opinion. I’m very bullish on Indian, Korean, and Taiwanese businesses and EEM offers the best opportunity to own them all.
The Elephant In The Room: Taiwan Semiconductor Manufacturing Company
Taiwan Semiconductor Manufacturing Company (TSMC) is the biggest holding in EEM by weight. TSMC has become a hot topic due to the ever-present demand for semiconductors, and they manufacture 90% of the world’s supply. I believe TSMC is a fantastic business, but as I mentioned before, China may invade Taiwan to reclaim it in the same way Russia is trying to do to Ukraine. TSMC’s stock price has suffered as a result, dropping 47% in just this year.
Fortunately TSMC has a plan to combat this potential invasion. They’ve broke ground on a factory in Japan near a Sony chip factory, one of its biggest customers. The plant is scheduled to start shipping in 2024 and is one of the handful of manufacturing sites that exist outside of Taiwan and China. TSMC has locations in the US and Indonesia to help reduce its geographical pressure.
Governments
One last negative I have is the unpredictability of the governments EEM has holdings in. I am not versed in the political workings of countries like India, China, Saudi Arabia, and others, and frankly I don’t know what can come about in the next few years. I’m buying an ETF to diversify the risk of owning stocks in just one foreign country, but time will tell what will happen in the geopolitical future.
Why Did I Buy EEM?
Diversification
I bought EEM for a few reasons, one of which is diversification away from the US. The US has long been top dog in the stock market, but will it be forever?
After reading up on the Lost Decade of the 2000s where valuations were so out of control that US Large Cap investors had no returns for 10 years, I decided I needed to add a hedge to my holdings which were largely US based.
Emerging markets have tons of room to grow if they are to catch up to developed markets, and that provides tons of room for growth. By taking a small percentage of my portfolio, I can take advantage of these fast-growing economies. Places like India with 52% of its population under 30 are going to keep growing at an astronomical pace and I’d like to be a part of that.
Valuation
EEM is near a 5 year low, and is priced at a 10.5x P/E ratio. The strong dollar has also taken its toll on foreign currencies and for my risk tolerance it makes sense for me to grab a small starter position here.
Covered Calls
If you’ve been reading my newsletter for a little while you know how much I love covered calls. Covered calls when done correctly are like turbo charging the wealth building process. With EEM trading around $35 per share it makes it easier to accumulate 100 shares and begin selling covered calls. With a Delta .20 to .30 strategy I expect to bring home ~$16 per week. Not bad for pressing a few buttons on my phone.
What’s The End Goal?
The end goal for me is to diversify outside of my home country of the US and make International stocks 10% of my portfolio. I’m going to sell covered calls weekly for additional income and sleep well at night knowing I don’t have all my eggs in one country’s basket.
Final Thoughts
EEM is an ETF I’m excited about for a few reasons. Up until this point, my portfolio was only about 5.4% invested in companies outside of the U.S. with ASML and CNQ as my main non-U.S. holdings. EEM will provide much needed diversification in emerging markets with much more room for growth, albeit with a little more risk and uncertainty. Surprisingly, the ETF has a lower beta of 0.72, which means it moves less than the S&P 500.
Once I get 100 shares I’ll be selling covered calls and reinvesting the premiums I get into other dividend stocks. This will create a snowballing effect that will set me up for financial freedom earlier than most.
I’m glad to add some international diversification to my portfolio, if we enter another lost decade I hope my international stocks can provide some positive returns.
Dose Of Dividends Podcast Is Out Now!
I’ve recently created a podcast called Dose of Dividends and the first episode is out now! I interviewed fellow investor Hunter of Dividends (@HuntDividends) and we talked about:
Dividend stocks we’re buying
His proud dad moment
How he began investing
Lessons he’s learned to become the best investor he can be
Listen here and if you love it, please give it 5 stars ⭐️⭐️⭐️⭐️⭐️
Dose of Dividends is hosted by Dr. Dividend, @DrDividend47, a 23-year-old dividend growth investor. The podcast is full of fun and informative takes on investing topics like dividend-paying companies, investment strategies, interesting stories from the business world, and what's happening this week in the stock market.
Dose of Dividends also showcases the stories of guests ranging from young, successful investors who are hungry to grow their portfolio, to seasoned, veteran investors that share their tips to accumulate long-term wealth.
Join us biweekly for insightful conversations on the world of finance and grow your portfolio alongside ours!
Memes Of The Week
Maybe this is what Uber needs to make them profitable:
The British Prime Minister Liz Truss resigned this week after demolishing the Pound and trying to impose tax cuts amidst high inflation.
The memes did not disappoint:
British tabloid The Daily Star placed a head of lettuce out on a table to see if it would outlast Truss's tenure.
SPOILER ALERT: It did.
One last one for good measure:
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Helpful Resources Are Here!
Don’t forget to check out my website full of awesome free resources to jumpstart your investing! 👇
Here’s my list of the best resources for financial freedom, enjoy!
Thanks For Reading!
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