By Suzanne Woolley | June 20, 2016
Illustration: Steph Davidson
Two things to do immediately: Make sure you're covered on the financial basics. Once that's done, you can start looking for smart ways to invest any excess cash making you next-to-nothing in a savings account.
We asked five leading investors to share their best ideas on where to invest $10,000 right now. Beaten-up emerging markets are popular. High-dividend stocks in Japan and low-cost target-date funds also got a nod.
There are many ways to invest in the areas these experts recommend. For those who want to take the simplest, broadest route into the asset classes highlighted below, Bloomberg Industries' exchange-traded fund analyst Eric Balchunas offers ETF suggestions after each entry.
Here's what our expert panel said.
Barry Ritholtz: Think Cheap
Chairman and chief investment officer, Ritholtz Wealth ManagementAssuming your portfolio is global, diverse, and mainly in low-cost indexes, we'd look at investment options that have underperformed over the past five years or so and are ripe for a reversion towards their historic average returns. Unlike cheap stocks, inexpensive asset classes have a lower chance of big drawdowns (broad asset classes don’t go to zero) and a higher probability of average or better returns.
Over the past five years, the U.S. stock market, using the exchange-traded fund SPY as a proxy, have gained 77 percent. The Emerging Markets Index (EEM), which includes almost 850 companies, is down 21.8 percent. That almost 100 percent spread is only the first part of our calculus. When we look at the longer-term cyclically adjusted price-earnings ratio (CAPE), a broad measure of how expensive or cheap a stock is, the U.S. is the most expensive, with a CAPE of 24.6. You have to go to the emerging markets to find a CAPE of 13.7.
Two inexpensive investments are DFA Emerging Markets Core Equity (DFCEX, purchased through advisers) and the Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX). The DFA fund costs 0.62 percentage point of assets invested, about half of the average emerging market fund. Vanguard's fund costs 0.15 percentage point. Over five years, the DFA fund is down 3.7 percent and the Vanguard fund is down 4.2 percent. Over 10 years, the DFA fund is up 4.5 percent and Vanguard's fund is up 3 percent.
A caveat: This ugly duckling investment will likely need time—quarters, or even years—to blossom into a beautiful swan.
Ways to play it with ETFs: Bloomberg ETF analyst Eric Balchunas points to the iShares Core MSCI Emerging Markets ETF (IEMG) , which holds 2,000 emerging market stocks and charges 0.16 percent of assets. For an ETF with a smoother ride, he likes the iShares Edge MSCI Minimum Volatility Emerging Markets ETF (EEMV). It charges 0.25 percent of assets.
Sarah Ketterer: Play Japan
CEO and fund manager, Causeway Capital ManagementSomething interesting is happening in the Land of the Rising Sun. The Japanese equity market has slipped 20 percent from its five-year high, reached last August, reflecting an economy unresponsive to monetary stimulus. Despite this gloom, many Japanese companies have the financial wherewithal to reward shareholders with dividends.
As of late May, over 200 Japanese stocks with market caps above $1 billion also have dividend yields greater than 2 percent (several offer yields of 4 percent), with dividend payout ratios less than 50 percent. In other words, these dividends should be well covered by earnings, and (thanks to the low payout ratios) have room to grow.
Some of the best-managed companies with generous dividends include Sumitomo Mitsui Financial Group Inc. (4 percent yield), Japan Airlines Co. (3 percent), Komatsu Ltd. (3 percent), KDDI Corp., and Hitachi Ltd. (both 2.5 percent). Bonds can’t compete. The 10-year Japanese government bond yield is negative, making generous dividends all the more appealing.
In the U.S., investor demand for high-dividend-yielding stocks, and exchange-traded funds that track such stocks, has risen sharply in our own prolonged low-interest-rate environment. Perhaps the same will happen in Japan. Mrs. Watanabe, the proverbial Japanese retail investor, wants income. It may make sense to own some of these income-generating, better-quality Japanese stocks before she does.
Ways to play it with ETFs: The WisdomTree Japan Hedged Equity Fund (DXJ) goes long the stocks mentioned by Ketterer, and many more, said Balchunas. It also shorts—bets against—the yen, and weights stocks by the size of their dividend. It yields 3 percent.
Mark Mobius: Look to China
Executive chairman, Templeton Emerging Markets GroupThe best place to invest $10,000 now would be in a diversified emerging-market portfolio. In our opinion, the long-term investment case for emerging markets remains positive as the region’s economic growth rates in general continue to be faster than those of developed markets.
In 2016, for example, emerging markets are forecast to grow 4.1 percent, more than double the 1.9 percent expansion expected in developed markets. In addition, emerging markets overall have much greater foreign reserves than developed markets, and the ratios of debt to gross domestic product in emerging-market countries generally remains lower than those of developed markets. Investors remain considerably underweight these markets, which we believe is supportive of further re-rating over the longer term.
Although investors have been concerned with China’s slowing growth rate, China remains one of the largest and fastest-growing economies in the world. We continue to see potential investment opportunities across different segments of China’s market and believe there is still a lot of room for infrastructure growth to catch up with global and regional peers'.
On Brazil, despite the dire headlines, the country has great export potential in manufacturing and agriculture. Additionally, we are encouraged to see greater concrete action taken to tackle corruption, which fuels our optimism that Brazil could be on the brink of positive change.
Ways to play it with ETFs: Balchunas suggests the iShares MSCI China ETF (MCHI), which tracks all kinds of China shares, except A shares, and is the cheapest in its class with an expense ratio of 0.62 percent. Another idea: the iShares MSCI Brazil Capped ETF (EWZ), which he said is the most liquid of the emerging markets ETFs and tracks the largest stocks. It, too, charges 0.62 percent.
Rob Arnott: Profit From Fear
Co-founder, Research AffiliatesMany investors prefer comfort, chasing what is popular and loved, rather than pursuing what is out of favor. The markets do not reward comfort. Whatever is newly expensive has two attributes: wonderful past returns and, in most cases, lousy future returns. Whatever is cheap became cheap by treating us badly in the past, but is priced to deliver superior returns. Successful contrarian investing requires us to live with discomfort, for being “wrong” and alone. But bargains do not exist in the absence of fear.
Where to invest today? The protracted growth-stock bull market is currently presenting the best opportunity to pivot into deep value. Why? For a very simple reason—people are afraid. Recent markets have seen a horrible storm for value investors. Developed value stocks have lagged behind growth stocks by 3 percent per year for the three years ending May 31. The storm intensified in 2015 with value stocks lagging behind growth stocks by 7.6 percent across developed stock markets, a magnitude only surpassed by the tech bubble and the global financial crisis. We also felt the pain in emerging markets, where value stocks became as cheap, relative to growth, as they were at the peak of the tech bubble.
History teaches that when valuations are extreme, “mean reversion,” a move towards historical norms, is likely. Once value stocks turn, the recovery can be fast and intense. Buying value stocks when they are most shunned, especially in the deeply unloved emerging markets, is scary. The best investment opportunities are often scary.
Diversify. But carve out 10 to 20 percent for the most unloved part of the market: emerging markets value.
Ways to play it with ETFs: There is no emerging markets value ETF. The First Trust Emerging Markets AlphaDEX Fund (FEM) uses growth and value factors to select stocks. Its holdings have an average price-earnings ratio of 11.5, one of the lowest in the emerging market ETF category, said Balchunas. It's pricey, charging 0.80 percent.
Francis Kinniry: Hit the Targets
Principal, Vanguard Investment Strategy GroupIf the investment was for a longer-term objective, I would determine when I would need to start withdrawing the money and then select the target-date fund that most closely matches that date. In a single target-date fund you can get exposure to thousands of securities, and dozens of different asset classes and factors, potentially covering the vast majority of the public capital markets. This can be accomplished at a very low cost, and low costs have been demonstrated in every study we have seen to be the best predictor of success.
And target-date funds are low-maintenance, rebalancing among all of the asset classes and factors. Numerous studies show that investors not only fail to rebalance but they tend to follow recent performance, costing them 1 to 2 percent in return annually. Simplicity is competitive, and target-date funds are simple, though they can be extremely sophisticated under the hood. Of course, much will depend on the fund sponsor, but our target-date funds have been extremely competitive with the most sophisticated institutional investment vehicles available.
Ways to play it with ETFs: A target-date fund has lots of parts to it that an exchange-traded fund doesn't, so there's no real way to play Kinniry's idea with ETFs. An asset allocation play, however, could be the iShares Core Growth Allocation ETF (AOR), said Balchunas. It has 60 percent in equity ETFs and 40 percent in bond ETFs. It charges 0.27 percent.