IVV Vs. EEM: S&P 500 To Struggle As Emerging Markets Gain

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Investment Thesis

Over the past ten years, the S&P 500 has been a great place to be. U.S. stocks have gained on the back of a strong dollar, money creation, multiple expansion, lower taxes, and a booming economy. However, history shows us that the decade ahead is often completely different than the one that preceded it. We are betting on a changing of the tides.

Strong tailwinds and a large margin of safety point to a decade of outperformance for the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM). Lower returns, in the range of 6% per annum, could lie ahead for the S&P 500. Based on our fundamental analysis, we believe EEM will return 13% annualized and beat the iShares Core S&P 500 ETF (NYSEARCA:IVV).

How The Cycle Works

Long periods of underperformance and lost decades make no one excited about buying a stock or ETF. Typically after a decade of underperformance, only real investors remain.

If one thinks of the S&P 500, one thinks of an upward sloping curve. Many believe the S&P 500 will continue to compound at 10% per annum for decades to come. But, history shows us that is not always the case.

Below is a chart of the S&P 500 from 1999 to 2012:

Data by YCharts

EEM has suffered a similar lost decade:

Data by YCharts

It is often the long periods of zero gains that lead to enormous bull markets. Maybe the best example of this is how the enduring pain of the Great Depression made the S&P 500 the best performing index over the past century. A long period of consolidation for technology from 2000 to 2015 was followed by an outstanding bull market for the NASDAQ. The time has come for Emerging Markets.

Emerging Markets Of The Past

What if we told you that America too was once an emerging market. The New York Stock Exchange was founded in 1792 and progressed through a turbulent history to become what it is today.

Japan was also an emerging market. The Tokyo Stock Exchange was founded in 1878. The country became more capitalist as the decades passed. As the market matured, the NIKKEI 225 even outperformed the S&P 500 from 1970 to 1990, gaining approximately 14% per annum to the S&P 500’s 7%.

Many emerging markets will also become developed markets one day. Some EEM countries could even surpass the United States in terms of GDP. Therein lies the opportunity.

A Head To Head Comparison

Source: Image created by author with data from iShares EEM and IVV

During a time of near record-low unemployment and a booming U.S. economy, the S&P 500 has failed to price in the cyclicality of earnings. IVV stands at a PE of 20, with just a 1.4% dividend yield. Even more telling is the price to book ratio. The ratio peaked at 4.7 in December of 2021, a valuation not seen since the 2000 dot com bubble. This illustrates how much air is priced into U.S. stocks if earnings should one day decline.

On the other hand, EEM has a PE of just 11.5 despite its 15% return on equity. The U.S. dollar has gained against EEM currencies since 1995. Measured in local currency, EEM has actually delivered faster earnings growth than the S&P 500, growing 8% per annum since 1995.

Country Exposure

Region Percentage of Revenues Region Percentage of Assets
United States 71% China 30%
Rest of World 29% Taiwan 16%
India 13%
South Korea 13%
Brazil 6%
Other EM 22%

Source: Image created by author with data from iShares EEM and S&P Global

Individual Holdings

Company: % of Assets Company: % of Assets
Apple (AAPL) 7% Taiwan Semiconductor (TSM) 7%
Microsoft (MSFT) 6% Samsung (OTC:SSNLF) 6%
Amazon (AMZN) 3% Tencent (OTCPK:TCEHY) 3%
Alphabet (GOOG) 2% Alibaba (BABA) 2%
Tesla (TSLA) 2% Reliance Industries (RELIANCE)


Source: Image created by author with data from iShares EEM and IVV

A Look At Global Valuations

Percentage of Global Market Cap (By Country):

Share of Global Market Cap (Statista)

Because the value of U.S. stocks is so much larger than the U.S. economy, the S&P 500 desperately needs globalization to continue. The U.S. makes up 60% of the world’s stock market capitalization, but only 24% of the world’s GDP. Meanwhile, China makes up 18% of the world’s GDP, but only 3.6% of the world’s stock market capitalization. This gap is extremely likely to close.

CAPE Ratio of The S&P 500:

CAPE Ratio of The S&P 500 (multpl.com)

Several important market bubbles have been identified by the CAPE ratio, also known as the Shiller PE. The CAPE adjusts for cyclicality by using the average earnings of the past 10 years. For the S&P 500, the ratio reached 30 only three times: 1929, 2000, and today.

The total CAPE ratio for EEM is approximately 16.5, versus the S&P 500’s CAPE ratio of 32.5. To illustrate how cheap emerging markets are now, the S&P 500 bottomed at a CAPE ratio of 15 back in 2009.

Below are the historical 10-year returns of the S&P 500 versus its CAPE ratio:

Actual Returns of S&P 500 vs CAPE (Advisor Perspectives)


When it comes to ETFs, we believe focusing too much on macro risks can cause investors to miss out when valuations are at their cheapest. There were plenty of risks in 2009, but it was a great time to buy. Great investors like Warren Buffett and Peter Lynch achieved a great deal of success by focusing their attention away from Macro headlines. At the Berkshire Hathaway 2022 annual meeting, Buffett said, “We have not been good at timing.” He continued, “We’ve been reasonably good at figuring out when we were getting enough for our money.” We simply believe investors are now getting enough for their money with an investment in EEM.

Despite our views on macro risks, we do believe that a long-term holding period is necessary. In the short-term, essentially anything can happen. Some of the main risks involved in increasing exposure to EEM are:

  1. Geopolitical risks
  2. Share ownership structure (VIEs)
  3. Non-GAAP financials
  4. Currency risk
  5. Economic headwinds

It is our view that none of these risks are inherently permanent, all are subject to change. For example, changes in currency value could be a positive, as well as a negative. However, one could apply an additional margin of safety to their valuation to account for the current risks, such as Non-GAAP financials or contractual ownership (VIEs).

We have a tentative “Hold” rating on IVV. However, there are several reversion to the mean risks that are not discounted in the price:

  1. The 10-year treasury yield is below its historical mean
  2. The corporate tax rate is below its historical mean
  3. The unemployment rate is below its historical mean
  4. Profit margins are above their historical mean

Should any of these factors change, it could negatively affect the valuation and the underlying earnings.

An Estimate Of Future Returns

For EEM, we estimate a total return of 13% per annum after dividends.

  • Assuming EEM currencies revert to the mean, earnings are likely to grow at 8%. Compounding EEM’s earnings per share ($3.65) at 8% per annum, gives us $7.90 per share in 2032. Even if we apply a 20% risk premium, this strong growth should warrant a multiple of 15. Our 2032 price target is $119 per share.

For IVV, we estimate a total return of 6% per annum after dividends.

  • Assuming the past decade’s tailwinds revert to the mean, earnings are likely to grow at 6.5%. Compounding IVV’s earnings per share ($20.88) at 6.5% per annum, gives us $39.20 per share in 2032. We are using a multiple of 16, the S&P 500’s historical mean. This gives us a 2032 price target of $627 per share for IVV.

EEM’s 0.68% management fee could weigh on your return. To avoid this, we advise looking at other emerging market ETFs. iShares Core MSCI Emerging Markets ETF (IEMG), SPDR Portfolio Emerging Markets ETF (SPEM), and Vanguard FTSE Emerging Markets ETF (VWO) have much lower management fees. For more on IEMG, check out my article IEMG: Emerging Markets Set To Outperform.


An emerging markets investment is perhaps the easiest way to outperform the S&P 500. Global money has driven up the price of American business to historic valuations, indicating lower returns ahead for IVV. We believe now is the time for long-term investors to get exposure to emerging markets. The numbers do not lie, a fundamental analysis points to a decade of outperformance for the MSCI Emerging Markets ETF.