Take a look at these side-by-side charts, showing the MSCI Equity Sector Weightings from 1995-2013. One chart tracks sector weightings among emerging markets while one tracks sector weightings among developed markets.

If I asked you to label one chart for emerging markets and one for developed, could you do it?  It turns out the one of the left is for EM and the one on the right is for DM. But what’s so surprising to me is that over this 18 year period, how similar the sector weightings between these two types of markets has become.

While investors often associate the emerging world with resources, these days, emerging markets are just as likely to be associated with banks. Financials make up 28% of the MSCI Emerging Markets Index, compared with a 22% combined share of energy and materials and, interestingly, a 21% financials share in developed markets.

My colleagues at the BlackRock Investment Institute recently pointed out that perhaps the label “emerging markets” has begun to outlive its use.  Market correlations in EM are at their lowest level since 2006, and the disparity is growing all the time as economies and markets mature at very different speeds.

How is this playing out when it comes to flows of emerging market exchange traded products?

EM ETPs finished 2012 with a record quarter of inflows. Bumper EM equity ETP inflows of $10.9 billion in January turned into outflows in February and March. While it seemed that the tide had swiftly turned on EM stock sentiment, as I pointed out in a recent blog post, the headline outflow numbers actually belied a flurry of activity below the surface.  Assets may have been leaving some of the larger EM equity ETFs, but there were still inflows occurring in some of the newer and more granular EM funds.

As the distinction between EM and DM becomes somewhat blurred, and the number of EM funds expand, we’re seeing investors seek more granular exposures to emerging markets.  Depending on investment objectives, some investors are choosing to add funds that offer exposure to the less risky EM countries, while others are looking for the stronger sectors within EM.

Now, none of this is meant to imply that emerging markets are no longer risky (they are) or that they have surpassed developed markets in terms of investment stability (they have not).  And we expect that broad, diversified EM equity funds will always have a place in many investors’ portfolios – particularly those who don’t have very specific views on emerging markets.  But the increased interest in individual countries and other narrow EM exposures could be an interesting byproduct of the changing nature of emerging markets themselves – and a good reminder to always check your portfolio to ensure you’re getting the exposure you expect.

Sources: BlackRock, Bloomberg

Dodd Kittsley, CFA, is the Head of Global ETP Market Trends Research for BlackRock and a regulator contributor to the iShares Blog. You can find more of his posts here.

In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

First, let’s consider two baseball teams. One has players at every position with a successful track record, including a mix of power hitters and singles hitters, starting pitchers and relievers. The other team…maybe the talent isn’t there, but the manager is pretty sure he can make some clever move at precisely the right time to win games.

Clever tactics can win games, but baseball fans know that a winning season depends on a solid lineup. But what is a solid lineup? What delivers value? What successful track records are likely to be maintained in the future?

Over the last 25 years, the specialized study of baseball statistics called Sabermetrics (on which Moneyball was based) has worked to develop answers to these questions.  Separating the signal from the noise in baseball been the subject of intensive research, as have methods of predicting player performance.

One of the most fascinating was developed by Nate Silver, famous for his election predictions, called PECOTA, which scores the similarity of current players against every player in baseball history. These scores are used to forecast a range of potential outcomes for players in the upcoming season. PECOTA digs into the stats and comparisons to identify the small differences that make one set of outcomes more likely than another.

And…what’s this have to do with retirement investing?

Sabermetrics and PECOTA illustrate the thinking that should go into your 401(k) investment. Maybe your retirement savings isn’t the place for you to prove how clever you are with high risk investments. Try to make choices with a reasonable range of expectations based on the strategic long-term consensus.

Also, think in terms of having a balanced set of skills in your investment lineup. Not every investment should be a high-risk, high-reward equity or a hot sector bet. Great lineups include less glamorous role players, like diversifying fixed-income funds or inflation-fighters like real assets.  You should also think about when to protect a “lead”  — the valuable nest egg you’ve accumulated as you approach retirement — by mixing in lower risk strategies, like short duration bond investments.

Target date funds do this for you automatically and they may be ideal for people who do not want to manage their lineup full time. Even if you do not invest in one, their asset allocation offers an excellent proxy for an age-appropriate investment lineup. Compare your retirement portfolio to the fund. Even if you have different ideas about your ideal lineup, the target date fund can help sharpen your own thinking when it comes to your retirement portfolio.

Chip Castille, Managing Director, is head of BlackRock’s US & Canada Defined Contribution Group. You can find more of his posts here.

But while market cap has historically been the most popular weighting scheme for indexes, over the years the ETP industry has brought more and more products to market that are based on non-market cap weighted indexes.  Examples of this include indexes that are price weighted, fundamentally weighted (e.g. dividend weighted) and low volatility strategies.  And it appears that investors are taking notice of this diverse and dynamic category: Year-to-date, non-market cap weighted equity ETPs have captured 42% of equity ETP flows, compared with the 20% of flows they brought in last year (see below).

One of the more interesting trends in this category has been the increased interest in ETPs that offer exposure to a minimum volatility strategy.  These products seek to track indexes that weight securities based on their tendency toward volatility, with the goal of minimizing volatility in the portfolio.  We’ve been following this trend closely since the first minimum volatility ETF was launched in May 2011, and continue to see assets flow into these products as more investors learn about their potential benefits.  Minimum volatility ETPs have experienced steady inflows so far in 2013, attracting average monthly flows of $1.6bn – more than triple the average monthly flows of $416mn they received in 2012 (see below).

So where is this increased interest in minimum volatility ETPs coming from?  Market conditions – specifically, increased volatility – have certainly played a role in the growing popularity of these products.  However, it’s a common misconception that minimum volatility ETPs are just for volatile markets, when really they have features that can potentially benefit a portfolio on a long-term basis.  For example, historically some of these indexes have experienced better risk-adjusted returns than their market cap-weighted counterparts.

Of course, we believe ETPs that track the more conventional, market cap weighted indexes will continue to play an important role in portfolios.  In fact, with ETP inflows on track for another record-breaking year, we think this non-market cap ETP trend is indicative of investors using more ETPs overall as part of their investment strategies.  And with more and more intriguing, potentially beneficial options to choose from, we should continue to see that trend increase, as well.

Sources: BlackRock, Bloomberg

Dodd Kittsley, CFA, is the Head of Global ETP Market Trends Research for BlackRock and a regulator contributor to the iShares Blog. You can find more of his posts here.

Past performance does not guarantee future results.  There is no guarantee that minimum volatility funds will attain a more conservative level of risk, especially during periods of extreme market conditions.

Until recently, classic defensive sectors like utilities, healthcare and consumer staples outperformed as investors were just starting to dip their toes back into stocks focused on those parts of the market many considered safer and less volatile.

But, as I wrote in my latest weekly commentary, over the past few weeks there has been some evidence that this is starting to change.

Utilities are down sharply in May, while healthcare and consumer staples companies are also shifting toward weaker performance. At the same time, we’ve seen better performance from energy, industrial, materials and technology firms, all of which are more cyclical in nature.

In other words, the real Great Rotation may just be a shift to cyclical from defensive sectors rather than a move to stocks from bonds.

The shift isn’t just a reflection of investors finally perhaps becoming more comfortable with risk. Despite the fact that profitability is actually somewhat lower for many companies in the defensive space, defensive valuations are at historically high levels.  The three classic defensive sectors – healthcare, staples and utilities – are trading at an average premium of more than 10% to the market. By way of comparison, back in the fall of 2009, these three sectors were trading at an average discount of around 40% to the broader market.

Given this, the recent underperformance of some of the defensive names makes sense. It looks as if investors are starting to recognize that some of the more volatile companies are good long-term plays, and, at the same time, it’s possible to spend too much for a good night’s sleep.

So assuming cyclical sectors’ outperformance continues, how should investors consider playing this Great Rotation? Here are three ideas.

1.)    Don’t completely abandon defensive sectors. Instead, investors should consider how much they’re paying for safety. In particular, the US utility sector looks quite overpriced and, despite its recent slide, probably has more downside. On the other hand, I currently advocate a benchmark weight to the healthcare sector.

2.)    Consider the energy and technology sectors. Many of the cyclical sectors look cheap at today’s levels. In particular, current valuations of the technology and energy sectors represent good long-term values. These sectors are accessible through the iShares Dow Jones U.S. Technology Sector Index Fund (IYW) and the iShares Dow Jones U.S. Energy Sector Index Fund (IYE), respectively.

3.)    Cast a wider net when looking for dividends. Part of the recent preference for defensive names has really been a preference for dividends in a world characterized by low nominal and real interest rates. But I would encourage investors to cast a wide net in their search for income and to look at dividend-paying companies from outside the United States, many of which look quite attractive. One way to access such firms is through the iShares Dow Jones International Select Dividend Index Fund (IDV).

Source: Bloomberg

Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist and a regular contributor to theiShares Blog.  You can find more of his posts here.

In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. There is no guarantee that dividends will be paid.

Narrowly focused investments typically exhibit higher volatility.  Technology companies may be subject to severe competition and product obsolescence. The energy sector is cyclical and highly dependent on commodities prices. Companies in this sector may face civil liability from accidents and a risk of loss from terrorism and natural disasters.

You always had great plans for me. You wanted me to go to college, marry the love of my life. You wanted me to find a job that made me happy.

Now that I’m older, in some ways, we’ve swapped roles.  You still pick me up when I’m down, and cook my favorite meals.  But now I have aspirations for you.

I see you retiring and traveling to beautiful places. I picture you in the Mediterranean somewhere, with a glass of wine in your hand, sun on your face.  You’ve always looked great in sunglasses.

I see you downsizing.  Every corner of our house tells a story… but it’s too big for you and Dad.  I see you moving from a cold, old house into a bright, warm one.  I think it has a breakfast nook.

I see you reading books to your grandchildren at bedtime; I see you at their soccer games.

I see you living until you’re old and gray, and I think you have your best years ahead of you.

But I don’t know if you see or believe in the same things.

I think you’re nervous about how to get there from here.  You’ve worked so hard for so long, and you worry that you’ll have to work even longer.

65 isn’t the magic number it used to be.  Is it 68?  Or 73?  If we’re lucky, you could live well beyond 85.  That means stretching your retirement dollars years longer than we thought. I know you still feel burned by the financial crisis, and “trusty” investments like bonds don’t seem so “trusty” anymore.

I know that it seems daunting, and talking about money or retirement or your fears with your daughter is not easy.  But you’re not alone.  It’s my chance to help you, and to try to repay you for all the carpools, bagged lunches and early morning wake-up calls.

Eventually, we’ll need to talk details… about your will, where you keep important documents, and other tough topics.  I even found a checklist that we could talk through and there are sites like these that help you to envision your retirement.

But we don’t have to start with the hard stuff.  We can start with the fun stuff.  What do you want your retirement to look like?  Do you want to travel?  Do you want to move?

I think if we plan just a little bit, we can get to the world that we both see.  And that’s something we can all look forward to.

Love, Jessie

Want to follow my financial journey? Check out my other recent posts here.

While emerging market equities have under-performed developed world stocks recently, equities in “pre-emerging”, or frontier, markets have actually outperformed both their developed and emerging world counterparts.

But it’s not too late to explore the frontier. Here are three reasons why investors should consider having a small strategic allocation to equities in the pre-emerging world.

Valuations: Despite their outperformance, frontier markets still appear to be good bargains. According to my team’s research, frontier markets, as represented by the MSCI Frontier Markets 100 Index, were recently trading at a price-to-book ratio of around 1.2, below the 1.6 ratio of the MSCI Emerging Markets Index. And while firms in frontier markets are less profitable than emerging market companies, frontier stocks look inexpensive even when this difference in profitability is accounted for.

Growth: Frontier valuations also look attractive considering that I expect these markets to experience faster growth in coming years than many emerging and developed world countries.

Diversification: Finally, companies in frontier markets tend to just focus on demand in their local countries and thus are less tied to the global economy than emerging markets like China and Brazil. As my colleagues Del Stafford and Daniel Morillo pointed out last fall in blog posts, this means frontier markets have exhibited a low correlation to emerging and developed markets and can add some diversification to a portfolio.

Though a growing number of funds are providing access to frontier markets, it’s important to remember that frontier countries generally have less established equity markets, and more regulatory and political unknowns than markets elsewhere in the world. In other words — investing in them can be risky.

That said, frontier markets are a strategic asset class, along with US equities, bonds and gold, that investors want to consider always having a little of in a portfolio. Assuming that frontier markets will likely decrease in risk as they develop over the long term current valuations present a potential buying opportunity. Frontier markets are accessible through the iShares MSCI Frontier 100 ETF (FM).

Sources: BlackRock Investment Strategy Group research, Bloomberg

Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist and a regular contributor to the iShares Blog.  You can find more of his posts here.

The author is long FM

In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Frontier markets involve heightened risks related to the same factors and may be subject to a greater risk of loss than investments in more developed and emerging markets.  Diversification may not protect against market risk or loss of principal.

In my opinion, both investors and policy makers would also be remiss in writing off the influential paper itself. While Reinhart and Rogoff have publicly admitted mistakes in their methodology, their paper’s basic conclusion still holds: Excessive government debt is likely to be an impediment to a country’s growth.

In fact, their major finding that economic growth fell by about 1% when gross government debt-to-GDP was high has been corroborated by several other studies. This historical association between excessive debt and slower growth has three important implications for the future of the US economy and market.

1. The United States is in the Reinhart and Rogoff danger zone. The United States, with gross debt-to-GDP of more than 100%*, is clearly already at risk of debt-related slow growth.
2. The United States isn’t likely to exit the danger zone anytime soon. As Reinhart and Rogoff point out, high debt-slow growth episodes tend to last for a very long time. This is likely to be the case for the United States considering that as more and more baby boomers qualify for Social Security and Medicare, the US debt problem is likely to grow significantly worse by the end of this decade, especially if there continues to be little progress on longer-term entitlement and tax reform.
3. US Earnings could suffer as a result. A 1% drop in economic growth would have enormous implications for US corporate earnings. In fact, top-line corporate growth is largely a function of economic growth.

To be sure, economists at the University of Massachusetts were correct to highlight the Excel error in Reinhart and Rogoff’s analysis. In addition, they provided a very useful service by reminding everyone that economics is not physics and doesn’t lend itself to exact thresholds and airtight relationships. That said, in a world in which developed market debt now averages roughly 100% of developed country GDP, both policy makers and investors ignore Reinhart and Rogoff’s paper at their own peril.

Source: Reinhart & Rogoff, BlackRock research

Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist and a regular contributor to theiShares Blog.  You can find more of his posts here.

*An interesting footnote to this debate: The government’s calculation for US GDP is about to be revised in a way that will bring this figure down. While I’m sure this represents an improvement in methodology, here’s a rhetorical question: Would the government have revised their GDP calculation had it made the number worse?

Interpreting surveys, however, is a bit of an art form. You need to put yourself in the mindset of the people you’re listening to in order to understand what they are telling you. Take, for example, the following:

• 60% of the investors polled say they are concerned about having enough income from their investments to live comfortably in retirement, and 54% say they are worried about outliving their savings.
• Yet, 73% say they are confident that their long-term investment strategy will allow them to reach their goals.

Which is it? Concerned, worried or confident? Is there a contradiction here? How can people be confident in their strategy and worried at the same time?

Maybe it isn’t a contradiction. Maybe it’s that the transition they are supposed to make at retirement is unclear and uncertain. There is a gap in most investors’ understanding of how to move from one phase of their life (saving) into the next phase (spending).They need to translate their savings into some amount of income, and that is very difficult to do. Compounding the problem is that it seemingly requires that we do the nearly impossible, which is to estimate our life expectancy with some degree of accuracy.

Put in those terms, the supposed contradiction between confidence and concern is common sense. In fact, this mirrors the state of the defined contribution industry. We have developed a pretty good understanding of how to help participants accumulate a nest egg. We are only now beginning to grapple with how to help them spend their savings over a lifetime. (Or, in industry jargon, “deccumulation.”) That is something we will be talking about a great deal in the months to come.

In the meantime, some fresh thinking is required to address concerns of investors seeking to generate income from their savings in today’s environment of low yields. It may be time to expand beyond traditional fixed income strategies and to look at income-producing equities as part of your asset allocation. Whatever the solutions are, there is one thing that is clear: There are no answers that don’t begin with us listening to you to understand the questions.

Chip Castille, Managing Director, is head of BlackRock’s US & Canada Defined Contribution Group. You can find more of his posts here.

However, as I write in my latest weekly commentary, this isn’t necessarily bad news for US stocks. Here are two reasons why.

1. Economic growth is just about fast enough to provide some support to corporate top-line growth. At the same time, slow growth is holding down costs and supporting corporate profitability. A slow economy means that the two big input costs – wages and capital – remain historically cheap.
2. With job creation stuck in second gear, the Federal Reserve is likely to keep monetary conditions accommodative and rates low. This means ample liquidity, which should continue to help stocks move higher.

So assuming that US stocks continue to slowly push ahead, as I expect, how should investors consider playing the advance? The composition of the rally is starting to change. First, large and mega caps are now outperforming small caps. Also, some of the more expensive defensive sectors – like utilities – are beginning to underperform.  At the same time, the technology sector looks cheap compared to its history.

As such, I continue to particularly like US mega caps and the technology sector, accessible respectively through the iShares S&P 100 Fund (OEF) and the iShares Dow Jones US Technology Fund (IYW).

Source: Bloomberg

Investing involves risk, including possible loss of principal. In addition to the normal risks associated with investing, narrowly focused investments typically exhibit higher volatility. Technology companies may be subject to severe competition and product obsolescence.

This has been a popular strategy so far this year – flows into fixed income ETFs year-to-date have been primarily into shorter duration ETFs as investors look to cut interest rate risk in their portfolios.  Through April 10^th, $10.2 billion has been allocated to short duration ETFs while $2.8 billion has been redeemed from longer duration ETFs.  Clearly investors are voting with their dollars.

This strategy can be accomplished by selling longer duration investments in favor of shorter duration ones, or by just adding shorter duration investments to bring down average portfolio duration.  As longer duration investments generally offer more yield, such a move will generally result in a lower yielding portfolio.  Investors who position in this way believe that the yield they give up will be more than made up for by avoiding the price loss that a longer duration portfolio would experience in a rising interest rate environment.

Yield curve positioning is a strategy that many institutional investors employ to position for rising rates. But using fixed income ETFs, pretty much any investor can make similar changes to their portfolios.  Within different ETFs, investors can now get access to the entire yield curve or just the short maturity portion.  For example, the iShares Treasury Bond ETF (GOVT) holds US Treasury bonds from 1-30 years, while the iShares 1-3 Year Treasury Bond ETF (SHY) is just the short end of the curve.  The table below has ETF options for buying the whole curve or short duration funds within investment grade credit, Treasuries, municipal bonds and Treasury Inflation Protected Securities (TIPS).

Investors should keep in mind that moving to shorter duration bonds may come with some unintended consequences. Since shorter maturity bonds have a lower yield, the returns may not keep pace with inflation.  After inflation, which has been trending around 2%, investors may be getting negative levels of yield.  Also, for investors with income needs, a short duration bond portfolio may not generate enough yield to achieve their goals.

An additional challenge with trying to position for rising interest rates is that all rates do not move in tandem, short term interest rates can move independently from intermediate and longer term interest rates.  Strategies that appear to reduce interest rate risk could actually underperform in a rising interest rate environment. How you go about reducing interest rate risk, and which interest rates you protect yourself against, will ultimately determine the success of your strategy.  I will talk more about this in a later post and discuss how to think about positioning in different rising rate scenarios.

With ETFs, shortening duration in fixed income portfolios can be efficiently implemented across a variety of sectors.  Before undertaking such a strategy, make sure you understand the trade-offs between buying short and longer maturity bonds.

Source: Bloomberg

Matt Tucker, CFA, is the iShares Head of Fixed Income Strategy and a regular contributor to the iShares Blog.  You can find more of his posts here.

Bonds and bond funds will decrease in value as interest rates rise and are subject to credit risk, which refers to the possibility that the debt issuers may not be able to make principal and interest payments or may have their debt downgraded by ratings agencies.