If you invested in the emerging markets at the bottom of the financial crisis in 2008, you would have doubled your money today. Emerging markets have been on a tear! It's been 10 years since I wrote an article on emerging markets. My last article on emerging markets was written 10 years ago. (For those of you that are interested, here's the link). With the recent boom, I thought now would be a good time to talk about emerging markets again.
What is an emerging market?
In many respects, an emerging market is the opposite of a developed market. The term 'emerging market' is typically used in the investment industry to describe a country that is growing and industrializing at a fast growth rate. Developed countries are more stable as they have already gone through that significant growth period.
The four biggest emerging markets are Brazil, Russia, India and China. Other countries that are also considered as emerging markets include Mexico, Argentina, South Africa, Poland, Turkey, and South Korea.
What is the best way to invest in an emerging market?
One of the biggest concerns about investing in emerging markets is the risk associated with these markets. There is greater risk when investing in emerging markets because of higher market volatility and greater chance of loss arising from political instability, corruption, less advanced market systems, currency, etc.
Although you can find ways to invest in individual companies from these emerging markets, it is typically better to find other ways to capitalize on the opportunities.
1. You could invest in a domestic company that is growing their presence in the emerging markets. A good example of this might be Coca Cola that operates in over 200 different countries around the world.
2. You can buy an emerging market mutual fund. According to Fundlibrary.com, there are 115 funds in the emerging markets category but upon closer examination, a lot of these funds are duplicates of each other. Emerging market mutual funds have the advantage of professional management from a fund manager who has more access and expertise to find investments in the emerging markets arena. This gives investors instant diversification by holding a portfolio of companies in the emerging markets. The downside to investing in emerging market mutual funds is the Management Expense Ratio (MER) which can go as high as 4.32%. Investors should always be mindful of the fees they are paying because mutual fund fees do matter.
3. You can also buy the emerging markets through Exchange Traded Funds (ETFs). The Canadian Couch Potato, Dan Bortolotti offers a couple of options for emerging market options in the ETF world, “As for emerging markets, I use the Vanguard Emerging Markets ETF (VWO), which has an extremely low cost of 0.27% and holds over 800 stocks. There are Canadian-listed ETFs that track emerging markets (CWO, CBQ and XEM), but personally I think they're all too expensive or too heavily focused on China.
Is Emerging Markets right for your portfolio?
I remember the emerging market boom in the early 1990's when I first came into the business. It was a great story then and a great story now but the one thing that has not changed is that it will go in a cycle and the glory days will become headlines for very different reasons when the cycle changes. Here's an old article I wrote on
I've always preached an investment strategy called CORE and EXPLORE (stay tuned for a post next week). My philosophy is that 80% of your money should be in good core holdings. They should represent true quality. This would include large cap equities, dividend stocks, balanced funds, fixed income, etc.
The rest of the portfolio (20%) can be more speculative and risky. I can't predict the future of markets any better than anyone else but I have been thinking that growth stocks are ready for resurgence. For the past year, I have been right especially with the emerging markets. I've always held an emerging market component in my portfolio but it remains less than 10%.