When building a portfolio, we always recommend incorporating a diverse mix of investment strategies. Buying shares in the best emerging market index funds can be one strategy to consider, but how can you determine if this is the right fit for you? Let’s take a look at these index funds.
Emerging Markets: Understanding This Classification
In countries or regions where stock markets exist, investment firms such as Morgan Stanley International (MSCI) or economic organizations such as the International Monetary Fund (IMF), will classify these markets as developed, emerging or frontier markets.
The criteria used by these groups for classification purposes typically include the growth rate of the economy, the political stability of the country, the strength and stability of financial systems in the country and other factors.
Developed countries, such as the United States, Japan and the United Kingdom have long-standing markets with general economic stability and stable governments. Emerging markets are located in countries with developing economies that are poised for growth and, hopefully, moving toward developed market status.
Country classifications can change if the stability of the economy or government changes. For instance, Greece was once considered a developed market, but because of economic turmoil, most market classifiers have this nation now listed as an emerging market.
Russia was for many years listed as an emerging market, but with the recent invasion of Ukraine, Russia has lost its emerging market status. Some market classifiers simply removed Russia entirely from any market classification list and others now classify Russia as a standalone market.
Of course, sometimes a market will improve enough to progress from a frontier market to an emerging market. For instance, Israel moved from emerging market status to developed status in 2010. Greece moved from emerging to developed in 2001, but, as stated above, has moved back into emerging status due to instability.
Why does market status matter? In general, investments in developed markets tend to be less risky than those in emerging or frontier markets. All investment options carry risk, so there is never a guarantee that your investment will yield positive results, even within a developed market.
On the flip side, while the risk with emerging markets or frontier markets might be higher, the rewards potentially could be higher. These two markets tend to have high levels of growth and younger, consumer-driven populations, which means there is plenty of opportunity in these developing economies.
What Is An Emerging Market Index Fund?
One reason why markets are classified as either emerging or frontier is that it can be difficult for investors to invest in these markets. While buying shares of a U.S.-based company can be handled with relative ease, this isn’t always the case with emerging markets in Africa, South America and Asia.
Purchasing shares of an emerging market-based mutual fund or exchange-traded fund (ETF), can be two of the easiest ways to gain exposure to emerging markets. The funds are diversified with multiple holdings, which can reduce risk. Mutual funds and ETFs also can be purchased either through your portfolio manager or even an online brokerage firm quickly and easily.
Funds are created by fund managers and the holdings can include a mix of investments that the managers believe will be profitable or the fund can be an index fund. This means that the investments in the fund were chosen to track a specific financial market index.
For instance, there are S&P 500 index funds that track the Standard & Poor 500, which includes 500 of the largest companies in the United States. These companies include Apple, Amazon, Google, Chevron, Pfizer, Coca-Cola and many others. This can be a good option for investors seeking long-term growth.
Index funds have some advantages over other types of funds. For one thing, because the fund is built to track an index, it is passively managed, which typically results in lower fees and expenses. Actively managed funds have higher fees simply because the management teams have to do more work than simply tracking an index.
What Are The Best Emerging Market Index Funds?
When it comes to selecting the “best” funds, this truly can be very subjective and entirely based on the needs and inclinations of the individual investor. Some investors might prefer investing in certain economic sectors, such as consumer discretionary or perhaps energy or information technology.
If you want passively managed emerging markets mutual funds, you could find a fund or ETF that tracts the MSCI Emerging Markets Index or perhaps an FTSE emerging market index, such as the FTSE Emerging Markets All Cap China A Inclusion Index.
Other investors might have a specific region or country in mind when they consider investing in emerging markets. For instance, an Africa investor might consider a South Africa ETF or opt for an Africa ETF that tracks the MVIS GDP Africa Index (MVAFKTR).
Other options include focusing on emerging markets in Asia, such as selecting a South Korea fund or perhaps a mutual fund or ETF that focuses on India or China or Latin America. These may or may not be "index" funds, as some of these investment options may be actively managed and not tracking an index.
These days, there are quite a few diversified emerging market ETFs to consider, and even a few frontier market ETFs. ETFs offer an easy way to invest in emerging market stocks and you can buy and sell shares throughout the trading day. With a mutual fund, you can only buy or sell at the end of the trading day once the fund's net asset value has been calculated.
We recommend studying each investment opportunity carefully. Begin by studying the company that is selling the mutual fund or ETF. Do some research about the fund managers and take a look at the value of assets under management and the expense ratio.
Research the companies in the mutual fund or ETF, as well as the sectors represented in the fund to determine if they align with your goals and values. For some emerging market investors, the goal is not just about profits but also looking for socially responsible investment options. Investing in these emerging countries can be a way to help boost the economies in this region, and that can be an attractive feature for some investors.
In the final analysis, determining which are the best emerging market index funds or best emerging market funds in general truly depends on the goals of the individual investor. Taking the time to research each investment opportunity is crucial, and we also recommend keeping a close eye on the performance of your investments to ensure that your portfolio remains as strong as possible to meet your long-term goals.