It’s no secret that US stocks have, on the whole, done exceptionally well over the past 12 years.
Although Covid-19 stopped global markets in their tracks, many markets are now hitting all-time highs again.
Yet the US stock market has continued to outperform versus global peers since a bottom was reached in March 2020.
For many investors, this has meant perhaps looking towards cheaper stocks in places such as emerging markets.
However, I have issues with exchange-traded funds (ETFs) that track emerging markets. That’s because you are often forced to buy many poor stocks, like state-owned banks and oil companies, along with the great ones.
Keeping that in mind, here’s why investors should buy these four stocks instead of an emerging market (EM) ETF.
Asia dominates emerging markets
For any investor who wasn’t already aware, Asia makes up the bulk of the benchmark EM index: the MSCI Emerging Markets Index.
Just four Asian countries – China, Taiwan, South Korea and India – together make up a combined 75% of the MSCI EM index (see below).
MSCI EM Index – Geographical breakdown
Source: MSCI Emerging Markets Index factsheet, as of 31 December 2020
What’s more astounding is how bad returns have been for the index. Given emerging markets are considered high-growth (but also high-risk) markets, you’d expect the returns from an EM index to be high over the long term.
However, that’s not the case. The MSCI EM Index’s net returns (as of 31 December 2020) over the past 10 years has been an annualised 3.6%. That is a far cry from the MSCI World Index’s 9.9% annualised return over the same period.
So what should investors do if they want to tap into these exciting growth stories? It, of course, means investing in the individual winning stocks.
Tech rules the roost
Unsurprisingly, the four biggest stock components of the index are the ones investors should be buying. Two are Chinese, one is Taiwanese and one is Korean.
They are the region’s tech giants; Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988), Tencent Holdings Ltd (SEHK: 700), Taiwan Semiconductor Manufacturing Co Ltd (TWSE: 2330) (NYSE: TSM) – also known as TSMC – and Samsung Electronics Co Ltd (KRX: 5930).
Sometimes, the quartet is referred to as Asia’s “TATS”, the region’s answer to the FANG technology giants in the US.
Unsurprisingly, they have been among the biggest winners within emerging markets over the past decade and the four have a combined weighting of 21.3% in the MSCI EM Index.
Not only do they make up a big share of the index but their returns have also been so much better than a lot of other EM stocks.
Take TSMC for example. The semiconductor chip foundry giant’s shares have returned over 750% during the past 10 years.
Meanwhile, Tencent shares have done even better – returning an unbelievable 1,900% over the past decade.
Add to the winners
For long-term investors, diversification shouldn’t become “diworsification” which is what investing in an emerging market ETF could easily become.
We should remember that, as long-term investors, some of our biggest gains will come from adding to our winners and holding on to them for decades.
For those of us wishing to gain exposure to emerging markets, these four stocks are a great foundation to build on.
Disclaimer: ProsperUs Head of Content Tim Phillips owns shares of Taiwan Semiconductor Manufacturing Co Ltd and Alibaba Group Holding Ltd.
