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2018.12.16 Penn Wealth Report Vol 6 Issue 06

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12 Penn Wealth Report volume 6 issue 06 16 Dec 2018 Penn Wealth Report Copyright 2018. All Rights Reserved. investment intelligence Emerging markets were the darling of the investment world, before they weren't. Why—and how—we are betting on a comeback. How to Play an Emerging Market Comeback Emerging Markets Entering into 2018, emerging markets around the world had one heck of a run in aggregate. Last year, for example, the MSCI Emerging Markets Index was up even more than the US indexes, rising 34%. And that makes perfect sense: a smaller, developing economy can cer- tainly grow at a much faster clip than, say, a $20 trillion economy like the US enjoys. But, all good things must come to an end, or at least take a breather. In 2018, as the domestic indexes have been struggling to stay above water, emerging markets are down a hefty 16%, giving back almost half of last year's gains. But, there are several of reasons to own a basket of these up-and-coming economies going into the new year. First and foremost, we see the Fed slowly putting the brakes on interest rate hikes. Emerging market countries typically run a current account deficit, meaning they rely on a constant stream of capital flowing in from other countries to fund that deficit; since the dollar is the world's fiat currency, monetary policy in the US has a great impact on emerging markets (witness, last year's downturn). Stable rates should also mean a more stable dollar, which will help the EM out- look (a stronger dollar makes buying the EMs more expensive for US investors, and vice versa). With the explosion of ETFs on the scene, there are now a number of ways to play emerging markets, from a wide-rang- ing basket of investments down to the granular, single-country option. While we love places like Poland, India, and Brazil, betting on one specific economy is risky business. Instead, our due diligence led us to a highly-liquid, low-cost, well diversified choice in the space: e iShares Core MSCI Emerging Markets ETF IEMG . IEMG holds a wide swath of strong companies across the EM realm—over 1,800, in fact—with a plurality of those companies headquartered in the "Asia Emerging" region. Around 12% of the companies are from Latin America, 8% from Africa/Middle East, and 6% from "Europe Emerging." Within the Latin American space, Mexico is barely repre- sented, which we view as a positive—that country has a lot of pain ahead of it. e fund's $72 billion weighted aver- age market cap is a bit higher than we would like, but that actually lowers the risk level on the portfolio (smaller-sized foreign companies hold greater risk). Another factor which lowers the fund's risk level is its tradability: with a hefty $50 billion in AUM it is about as liquid as they come. Finally, let's talk about cost. At 14 basis points (0.14%), expense ratios just don't come any cheaper for emerging markets exposure. As the 2018 emerging markets blood- bath ensued, investors rushed for the exits. at was not the case for this fund, how- ever. No matter which lookback period you choose, from one month to one quarter, from one year to five year, IEMG has notched positive net fund flows; an impressive feat in the face of a downturn. We added the iShares Core MSCI Emerging Markets ETF to the Penn Dynamic Growth Strategy at $49.01 per share, with a $60 initial price target and a $40 stop loss in case trade tensions take an unexpectedly dark turn in 2019. e content of this report reflects the personal views, opinions, and research of Penn Wealth Publishing. While measures are taken to help assure the accuracy of data, no guarantees can be made and the firm is not liable for any losses incurred by subscribers. is is not a solicitation to buy. Always consult your investment professional before investing any money.

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