Once again, investors are learning the hard way about the pitfalls of investing in emerging markets stocks and bonds.
Having outperformed a broad index of U.S. stocks by a wide margin in 2017, emerging markets stocks have headed in the opposite direction [1]this year. The Vanguard FTSE Emerging Markets VWO, -0.44%[2] as lost roughly 4% in 2018, compared with a 1.5% gain in the Vanguard Total Stock Market ETF VTI, +0.26%[3] .
(The Dow Jones Industrial Average DJIA, +0.21%[4] is off a bit this year, while the S&P 500 SPX, +0.32%[5] is slightly ahead. The small-cap Russell 2000 RUT, +0.15%[6] recently hit new all-time highs.)[7]
It’s the same story with emerging market bonds. The iShares JPMorgan USD Emerging Markets Bond ETF EMB, +0.62%[8] is down about 5% so far in 2018, vs. a roughly 2% year-to-date loss in the iShares Core Aggregate Bond ETF AGG, +0.28%[9] .
But even now, Wall Street and the financial media are full of “contrarian” stories touting the virtues of these markets.
“In a world where relatively few financial assets can be considered cheap, we believe emerging markets offer the greatest value[10]. They offer the lowest valuation of any major equity region,” wrote Lazard Asset Management in April in a piece that’s typical of Wall Street’s thinking.
As for emerging markets bonds, Pablo Goldberg of BlackRock said, "They have a higher yield, they have good fundamentals, commodities prices are firm, and investors can diversify their currency risk."
Actually there’s really only one reason to buy emerging markets bonds: “they pay well[11].” The iShares JPMorgan USD Emerging Markets Bond ETF, for example, yields 4.5% — two percentage points better than U.S. counterpart iShares Core Aggregate Bond ETF.
This column has argued for years...