Experts say that emerging markets are the fastest growing markets in the world. This is why billionaire investors like Ray Dalio include emerging markets ETF shares in their winning portfolios. Here is an overview of ETFs from emerging markets including strengths, weaknesses, who they are suited for, and best buying options.
What Is An ETF?
ETFs are relatively new on the investing scene. They first became available in 1993, and soon became a popular choice for investors. ETF stands for equity trading fund.
ETFs are similar to stock in that they represent ownership interest. Like stocks, ETFs are also traded in the stock market and the price changes at the close of each trading day. However, there are some critical differences between ETFs and stocks. These differences have to do with the structure of the ETF, and how they are traded.
ETFs are made up of a combination of bonds, commodities, and stocks. These investment modes are bundled together into large packages, called creation units, which can contain anywhere from 10,000 shares to 600,000 shares. On average, 50,000 shares make up a standard ETF.
Sponsors, which are typically large investment organizations like the Vanguard Group, set up ETFs. The ETF is then approved before being sold in dealer-broker trades, or to the public. ETFs often track with a specific index, such as the S&P 500.
Where Are The Emerging Markets?
Emerging markets can also be thought of as developing countries. Emerging markets are not considered “advanced” because they lack the maturity of nations that have a well-developed, highly regulated stock exchange. They do have monetary infrastructure within the county, like banks and a stock exchange system. In this way, they are more advanced than frontier markets.
These marketplaces contain businesses with a great deal of potential. As the marketplace matures, the initial ground-level investment could skyrocket. When you invest in businesses from Russia, South Africa, Brazil, China, India, or another fast-growing country, there is a high degree of growth opportunity.
Putting It Together
Emerging markets ETFs are bundles of stocks, bonds, and commodities that are heavy on shares from developing countries. Within this overarching group, there are many subcategories. One of the first differentiators is actively managed versus passively managed.
Within each of these categories, active and passive, you will find many different ETFs. An individual could decide that they want to invest in one particular area, or they could purchase an ETF that has shares of companies from a broader range of the geographic regions.
A diversified emerging markets portfolio would be one that has at least 50% of its assets in stocks from emerging markets, and those will be divided between 20 or so different countries. You can also buy ETFs that exclude one nation in particular if that is your strategy.
ETFs that are focused on stocks, bonds, and commodities from developing nations have unique strengths, which make them attractive to investors with specific goals. Here is a breakdown of the strengths.
Impressive Opportunity For Long-Term Growth
As mentioned above, investing in emerging market ETFs carries with it a high opportunity for growth in the long term. Investors who can maintain a long-range view of their investments can partake in exciting profits if they are willing to endure the wait and possible volatility along the way.
Because ETFs are large bundles of individual investments, they spread the risk of a single investment out. Depending on the particular type of ETF purchased, this could be a strength because if one group of investments go under, the rest may keep the ETF as a whole profitable.
If, however, the ETF is focused on one particular geographic area, though it may be spread out over different businesses within that area it still may lose value if the economy within that area takes a downturn.
Putting your money into this type of investment also comes with some drawbacks to consider. Here are two most significant.
ETF market trading is highly regulated and comes with fees. When you pay your broker a part of your profits, you are losing money. This is a drawback to consider.
Political Instability Equals Risk
When you invest in emerging markets, you take on risk. The positioning of the emerging market puts it into place economically where it may flourish and lead to massive growth, or it may encounter instability and economic turmoil.
Developing nations are not as secure or well-regulated as advanced nations, which makes them vulnerable to political upheaval and other economically detrimental events.
Who Should Choose Them?
Equity Trading Funds from emerging markets, as you can see, have many nuances. If you are interested in emerging markets, you need to be well educated with regards to world politics so that you can pinpoint the emerging markets that you want to invest in.
This will help you decide if you are going to buy into an ETF that includes many countries, focus on one in particular, or exclude a country due to instability or forecasts of economic strife that will have long-lasting effects.
You should also be very clear on your investing goals. Are you looking for short-term profits, or are you willing to keep your money in the game while an entire country transforms into a higher economic class?
What Are The Best Emerging Market ETF Options?
Here are a few excellent options that you should know about when it comes to ETF’s from emerging markets around the world:
- Schwab Emerging Markets Equity ETF
- iShares Asia 50 ETF
- iShares Emerging Markets Dividend ETF
- Vanguard FTSE Emerging Markets ETF
ETFs from emerging markets represent an exciting investment opportunity that can deliver high rewards when they are handled correctly. They have a unique structure and have the ability to tap into growth coming from developing nations over time. Successful investors often include securities from emerging markets so that they can profit from the rise of the developing country.