Investment advisors are gathered in Hollywood, Fla., for the ETF.com (formerly IndexUniverse) annual Inside ETFs conference. They are debating a tricky dilemma: What to do with emerging markets ETFs.
Why is that a problem? Because many of them have put their clients into emerging markets portfolios, and after four years of underperformance, questions are being asked.
Partly, it's the fault of academia—and the media that go along with them (ouch!). One of the tenets of Modern Portfolio Theory is that investors need to have a broadly diversified portfolio, since it can never be clear which sectors or countries will outperform. The theory is that diversifying across many asset classes poses less risk than putting all your eggs in one asset class.
Never mind that this theory has been challenged in recent years. Fact is, most of the world has bought into diversification. That's why we have so many strategists recommending that, say, 5 to 10 percent of your assets be in emerging markets.
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This was a tough thing to do even as late as 10 years ago, but the rise of ETFs has made it a lot easier to invest in odd corners of the world. The iShares MSCI Emerging Market ETF (EEM) started in 2003, and the fact that it went straight up like a rocket all the way into the end of 2007 caused it to attract a huge amount of assets.