Introduction
Whether you’re searching for additions to your retirement portfolio or your brokerage account, finding ways to diversify can be difficult. This is especially true when you start to understand how many asset types there are that most people not only don’t know about but also cannot access.
One asset that most people may have forgotten about are emerging markets. We’ll help you understand what emerging markets are and whether they would be a good addition to your investment portfolio.
An emerging market economy is that of a country that is growing globally. It may be similar to a developed economy but may differ or fall short in a few characteristics.
China is one of the most notable emerging market economies. Where the US economy grows at around 2.2% annually, China’s growth has been around 6% in the last few years and as high as 14% in some years recently.
Other notable emerging markets are Brazil, Mexico, Saudi Arabia, India, and Russia.
Individuals and institutions invest in emerging markets in similar ways, though more advanced investors may try others. Emerging market economies may come with high profit potential, but with higher profit potential comes higher risk.
· MSCI Emerging Market Index: One of the most popular methods is to invest in the MSCI Emerging Market index. This index currently represents 27 different emerging market economies and over 1300 assets. It is an Exchange Traded Fund (ETF), so most investment firms such as Vanguard and Fidelity will allow you to buy and sell shares of the Emerging Market Index (ticker EEM) for free.
· Individual Country Indexes: Many individual countries have their own ETFs listed on the NYSE and can also be traded like regular stocks. Mexico, for instance, is listed as ticker symbol EWW. This ETF represents 47 of the largest companies in Mexico and is a good asset for those investors engaged in a global macro strategy.
· Foreign Companies Listed on NYSE: There are several companies based in emerging market countries which are listed on the NYSE. Those investors wanting to be exposed to emerging markets can buy and sell shares of these companies like any other in the US. It should be noted that, while these companies may not be directly correlated to events in the US, they can still be exposed to risks that other US companies experience when it comes to stock market volatility. Examples of emerging market companies include JD.com (China), Taiwan Semiconductor (China), Infosys (India), and Posco (South Korea) to name just a few.
· Invest In Companies on Foreign Exchanges: For those investors who prefer going right to the source, most emerging market economies have stock exchanges just like developed nations. If the banking rules allow you to open a bank account in that country, you can invest directly in the home exchange of the company you want. Doing this can expose you to much higher risks because of the nature of emerging market economies. Also, liquidity in those exchanges will be significantly lower than investing in any of the above methods.
Are Emerging Markets Still a Good Investment?
Emerging markets tend to take a back seat when major developed countries are experiencing significant and continued growth. However, world economies are re-opening to find that there is huge potential in emerging markets. Those that manage to get back on track faster should be able to improve the outlook for their businesses.
Regardless of future prospects, emerging markets are a good investment to include in portfolios simply from a diversification standpoint. It would be a good idea to limit the allocation, but emerging markets, by definition, see greater growth than developed nations.
Final Thoughts
Emerging markets as a whole are good investments to include in any portfolio to make money. The economies of these countries show continuous growth and potential to become developed, though they are not quite developed. With the world re-opening, there are certain emerging market economies that investors should watch because a faster recovery after the pandemic could potentially result in sustained growth in the near term.
