When you hear the words “emerging markets” your interest might pique. Anything that is emerging has the potential to deliver significant returns. It’s like getting in on the ground floor of a public company that's expected to surge. The question is whether or not emerging markets still exist. If the answer is yes, then iShares MSCI Emerging Markets (EEM) might present an opportunity. (For more, see: Should You Invest in Emerging Markets?.)

What Is EEM?

Purpose: Tracks the performance of the MSCI Emerging Markets Index.

IPO Date: April 7, 2003 (Up over 330% since inception, but still hasn’t reached it's 2007 high).

Total Assets: $30.13 billion (as of 4/3/15)

Average Volume: 54.4 million

Yield: 2.15%

Annual Holdings Turnover: 22% (a little high, but not reason for concern)

Expense Ratio: 0.67% (relatively high)

MSCI Emerging Markets Index

In order to figure out where EEM will go, you need to take a detailed look at what it tracks, which is the MSCI Emerging Markets Index.

Sector Weightings (as of 2/27/15): Financials: 28.6%; Information Technology: 18.63%; Consumer Discretionary: 9.1%; Energy 8.22%; Consumer Staples: 8.16%; Telecommunication Services: 7.59%; Materials: 7.35%; Industrials: 6.78%; Utilities: 3.3%; Health Care: 2.27%.

Country Weightings: China 22.31%; South Korea 14.6%; Taiwan 12.76%; Brazil 8.17%; South Africa 8%; Other 34.17%.

'Other' is the largest category, but its broken down into 18 other countries. Therefore, China is the most important country for the MSCI Emerging Markets Index, which means it’s also the most important country for EEM investors.

A Look at China

China is still growing, but not at the same pace as in recent years. Unfortunately, the slowing trend isn’t expected to reverse itself. For example, the original 2015 GDP expectation for China was 7.6%, but that expectation has since been reduced to 7.1%. This is still a big number, but keep in mind that 2014 GDP growth came in at 7.4%. (For more, see: China's GDP Examined: A Service-Sector Surge.)

The most recent news out of China is a slowing housing market. Home prices declined in 69 of 70 cities, with the average decline being 5.1% on a year-over-year basis. Currently, there is a supply gut, which should come as no surprise to anyone who paid attention and watched China build real estate as if growth would continue forever. At the moment, China has excess supply that will take between two and five years to clear. With that much supply, it would be difficult to imagine demand increasing.

Housing is 15% of the Chinese economy, but it can have a snowball effect on the remainder of the economy. If people aren’t finding wealth (or anticipating wealth) in their homes, then they’re not likely to spend as much. This, in turn, slows growth. (For more, see: China’s Economic Indicators, Impact on Markets.)

Other Expectations

The other four big countries on the list for the MSCI Emerging Markets Index are South Korea, Taiwan, Brazil and South Africa. Those countries expect 2015 GDP growth of 3.8%, 2.8% and 2.5%, respectively. Not bad. Then there’s Brazil, where 2015 GDP is expected to come in at between 0.3% and 0.5%. Brazil is dealing with the biggest corruption case in its history and stagflation. The odds of a turnaround in the near future are miniscule. (For related reading, see: Get Emerging Markets Exposure with this ETF.)

The good news is that the MSCI Emerging Markets Index reviews its weightings every quarterly. Necessary adjustments are made.

The Bottom Line

Some markets are still emerging, but it’s very difficult to find markets that are emerging at the same pace as in the recent past. Therefore, by investing in EEM, you would likely be investing in an ETF that doesn’t offer an exceptional risk/reward ratio. You might want to consider looking elsewhere. (For more, see: An Evaluation of Emerging Markets.)

Dan Moskowitz does not own any positions in EEM.

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