Emerging markets represent countries in a transition toward what economists consider a fully developed economy. For investors, economic growth represents the opportunity to capture investment returns, and emerging markets have the potential to offer a high reward for their risk due to the fast pace of their economic growth. A+ Investor subscribers can use the ETF Screener or Mutual Fund Screener to quickly locate promising exchange-traded funds or mutual funds that focus on emerging markets.
There are two key advantages that emerging markets have for inclusion in your portfolio: international diversification and high growth relative to developed economies. International investments can be a good diversifier for your investment portfolio because economic downturns in one country or region, including the U.S., can be offset by growth in another. The highest-growing and highest-returning stocks are going to be found in the fastest-growing economies.
Remember that even U.S. companies look to emerging markets for growth opportunities in their business operations. For example, the revenue mix of Coca-Cola reflects the fact that it is popular in China, Japan and the U.S.
The secret to adding emerging markets to your portfolio is to limit yourself to reasonable risks. Smart investors know that the individual risk of a particular investment can be diluted away through building a diversified portfolio. It’s possible to take advantage of the potential gains from an emerging market without increasing risk substantially by including them as a section of your overall portfolio.
Funds are a great option for investing in emerging markets because you can add an entire country or a combination of countries to your portfolio. Funds, as a collection of investments, offer a first layer of diversification for investors.
AAII’s ETF and Mutual Fund Screeners both have predefined “first cut” screens that look for emerging market ETFs and no-load funds, respectively, that have outperformed their category peers over the last one- and three-year periods. You can load these screens from each screener’s filter menu or from the First Cut Screens pages, linked at the A+ Investor Toolkit dashboard.
The First Cut Screens provide an excellent base from which to start looking more closely at opportunities to enhance your portfolio’s return and diversification through investments in emerging markets. You can add filters to these predefined screens to further refine the list and save your new screen.
Emerging market ETFs and mutual funds come in many shapes and sizes and it’s important to remember that not all funds are created equal. When investing in emerging market funds, there are two issues to keep in mind: Keep your fees down and invest in funds that are large and liquid enough to buy and sell without complications.
After screening for a group of funds you can also take a closer look at them with their Evaluator pages, either by clicking on their ticker in the screeners or by typing their ticker into the search at the top of AAII.com.
