How to Invest in Emerging Markets
It seems that no matter where you invest your money, it is a nerve racking roller coaster ride. How can you invest your money and still be able to sleep at night, diversification is one way to do this. And to be properly diversified you need to have some emerging market stocks in your portfolio but keep in mind, developing markets are volatile and risky.
What Are Emerging Markets
Emerging markets are stock markets in countries that have a developing economy and market. There is a difference between emerging market and global or international stocks. These countries have large and growing populations, populations of people who want to buy goods and services and a decent industrial base to manufacture and sell their goods to their local population and globally.
Examples of emerging markets would be the economies, companies and stocks in countries like South Korea, South Africa, India, China, Indonesia and Brazil. You will often hear the term BRIC. BRIC stands for Brazil, Russia, India and China. The BRIC companies and stocks markets are well known now and heavily invested in.
To go further, look for the countries outside of the BRIC markets. Goldman Sachs has a list called the Next 11 emerging markets, this list includes the countries of Mexico, Egypt, Nigeria, Turkey, Pakistan, Indonesia, Bangladesh, Vietnam, Iran and Philippines . Other emerging markets could include several South American countries like Argentina, Peru and Chile.
Why Invest in Emerging Markets
Having emerging market stocks in your portfolio help to diversify your stock holdings. When the US or Europe growth stocks go down or into a bear market, many times the developing market economies and stocks will do the opposite and go up. This helps to even out the ups and downs of the US stock holdings in your portfolio. The developing countries were not nearly as negatively affected as the US and Europe by the credit crises either.
The stocks of emerging markets can have wild swings up and down and should only account for about 5% to 10% of your entire portfolio. These stocks can also swing wildly with internal problems in the country that wouldn’t affect other emerging markets.
Make sure you know what you are investing in or you could have too much emerging market stocks in your portfolio if you also had international or global funds as well, so know what each ETF or mutual fund has in them.
How to Invest in Emerging Markets with Exchange Traded Funds
There are several ways to include emerging markets into your diversified portfolio. One way is to buy the stocks of companies in these markets. That would take a lot of research and time to find the companies in each country yourself. A better way to invest in emerging markets would be with mutual funds or Exchange Traded Funds (ETF). These ETFs have a lower expense ration than the emerging market mutual funds with an average expense ratio of .69%. Some go much higher so be aware of this.
If you strongly believe in a specific developing country, you can buy an ETF that follows the companies in that specific country. Here is a list of some of those emerging country specific ETFs and their symbols.
- iShares MSCI Mexico (EWW)
- iShares MSCI Turkey (TUR)
- iShares MSCI South Korea (EWY)
- Market Vectors Vietnam (VNM)
- Market Vectors Indonesia (IDX)
- Claymore/AlphaShares China Small Cap (HAO)
- PowerShares India (PIN)
- iShares MSCI Taiwan Index (EWT)
- iShares MSCI Thailand Invest Market Index (THD)
A more diversified way to invest in emerging markets would be investing in one or more of the following ETFs that have a nicely diversified group of stocks from different developing countries.
- iShares MSCI Emerging Markets Index (EEM) is currently invested in 23% Latin America, 53% Asia except Japan, 17% China, 15% Brazil, 13% South Korea, 10% Taiwan and 8% in South Africa. This is one of the most traded and popular emerging market ETFs.
- First Trust BICK Index Fund. A new idea for an emerging market ETF is BICK. Take the Russia out of the BRIC and add in South Korea and you have BICK.
- Vanguard Emerging Markets (VWO) with a low expense ratio of .27%.
- SPDR S&P Emerging Markets Small Cap (EWX)
- Dow Jones Emerging Markets Composite Titans index Fund (EEG)
- SPDR S&P Emerging Middle East and Africa (GAF)
How to Invest in Emerging Market Bonds
You don’t have to invest in only stocks of emerging markets; you can also invest in the bonds of these companies through mutual funds and ETFs. Emerging markets can be volatile and risky enough, if you want to invest in bonds of emerging market companies, make sure you know if the ETF or fund has junk bonds or exactly what grade of bonds.
- PowerShares Emerging Markets Sovereign Debt (PCY)
- iShares JP Morgan Emerging Markets Bond (EMB)
- Fidelity New Markets Income (FNMIX)
- PIMCO Emerging Markets Fund (PAEMX)
Emerging Market Mutual Funds
There are hundreds of different mutual fund companies and most of them have their own emerging market funds. As with US mutual funds, you can invest in value or growth, large and small cap companies in these markets. Some of the more popular mutual funds you can check are Vanguard, Fidelity and T. Rowe Price. Here are a few emerging market mutual funds to look at.
- Vanguard Emerging Markets Index (VEIEX)
- Bernstein Emerging Markets (SNEMX)
- T. Rowe Price Emerging Markets (PRMSX)
- DFA Emerging Markets Value Fund (DFEVX)
- SSgA Emerging Market (SSEMX)
- Lazard Emerging Markets (LZOEX)
Emerging markets are great for adding diversity to your portfolio. Be careful of overlapping in your portfolio since some global or international funds can have some emerging markets as well. To find investments that meet your own needs, use ETF and mutual fund screeners to look for emerging market funds on MSN money and Morningstart.com.
© 2010 Sam Montana