Emerging markets stock index funds are a fantastic addition to any Millennials retirement portfolio. If you’ve been following my blog you know that I have been a bit skeptical on internal funds in the past. I probably wrongly felt that domestic U.S. mutual funds were sufficient, considering just how much internal sales and business companies like Apple, GM, Coca Cola, etc. do.
I fully understand just how much “global” diversification helps a retirement portfolio. That is why I recently bought into Vanguard Total International Stock Index Fund Admiral Shares (VTIAX). My employer sponsored 401(k) retirement plan only has two international mutual fund options and both have high expense ratios (0.50% or higher). The aforementioned Vanguard fund (VTIAX) I bought into only has an expense ratio of 0.12% (89% lower than the industry average).
My wife and I both have a Roth IRA with Vanguard. Her account has been open for several years and therefore has a much bigger balance than mine because I just opened it in early 2016 to supplement my work 401(k). This allowed me to sell some other funds in my wife’s Roth IRA to buy into the Vanguard Total International Stock Index Fund Admiral Shares (VTIAX). She is also invested in Small-Cap Value and REIT index funds.
Emerging Markets Stock Index Funds
My next plan is to buy the Vanguard Emerging Markets Stock Index Fund (VEIEX) in my Roth IRA. I am currently invested in the Vanguard Target Retirement 2040 Fund (VFORX). As I said earlier, being diversified globally is proper diversification and will benefit your retirement portfolio greatly. I read a number of books, articles and I’ve listened to hundreds of podcasts on the subject. When paired with a portfolio heavily allocated in the S&P 500, international index funds, especially emerging markets, can help your retirement portfolio in a volatile, up-and-down market.
Come to find out, emerging market funds zig when other funds zag. Meaning emerging market funds don’t move in lockstep with blue-chip US companies. So obviously that helps with proper diversification by adding more variety to your portfolio holdings.
What Makes an “Emerging Markets” Fund?
Most emerging market index funds invests in stocks of companies located in emerging markets around the world, such as Brazil, Russia, India, Taiwan, and China. Roughly 80% of the fund would invest in actual emerging markets, while the remaining 20% would invest in developed countries. Approximately 70% would be invested in Asia, 15% in Europe/Africa, and 15% in Latin America.
Emerging market mutual funds tend to have an opposite correlation to the S&P 500 over the past several years. This is why I strongly advise all Millennials add an emerging markets index fund to their retirement portfolio. Approximately 15% in emerging markets would suffice.