Investing in emerging markets

Find out how to invest in emerging markets and learn about the best ETFs, funds and investment trusts available to UK investors.

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Investing within emerging markets is a strategy used by investors all over the world, and it used to be much more difficult. Nowadays, putting your money into these far-flung markets is easier than ever; you’re able to access these investment opportunities right at your fingertips. So, to help with your research, we’re going to explain all the essential details about this type of investment and reveal some of the best emerging market ETFs, stock market funds and investment trusts.

What are emerging markets?

This is a tricky question because there’s no textbook definition. But in most cases, this refers to countries, regions or economies that are not fully developed but are on the right track and growing at a rapid pace. The 3 main characteristics of an emerging market include:

  1. Developing country – average income per capita is lower than in developed countries (but there are exceptions like South Korea and UAE).
  2. Fast growth – often measured using GDP (gross domestic product).
  3. High volatility – currency fluctuations and many other factors mean that economic performance can be very volatile.

What is an emerging economy?

According to the IMF, an emerging economy can also have the following attributes:

  • Access to markets
  • Growing middle-income
  • Increasing economic relevance on the global scale
  • A decent economic track record in recent years

The term “emerging market” was first used in the 1980s and created by Antoine Van Agtmael. The World Bank wanted to encourage investment into countries and markets in third world countries but thought the term “third world” wasn’t appealing to investors, so they decided to give it a rebrand.

How do emerging markets work?

These markets will mostly operate in a similar way to developed markets. But, there can be slightly different financial structures based on a country or region’s politics, geography, religious beliefs, or even cultural traits that are unique to a specific place.

While investors talk about this sector as one big category, it’s worth being aware that there can be big variations within the companies and markets across these regions. Countries or markets that are thought of as “emerging” won’t all be at the same level of development, they will fall along a spectrum.

It’s important to remember that not all emerging economies carry the same level of growth potential or risk from an investment perspective. One way to account for this is by investing in emerging markets through an ETF, fund or investment trust. Doing this can be one of the best ways to invest without needing lots of detailed, in-depth investing information for a single market.

How to invest in emerging markets

Here’s a simple step-by-step guide explaining some of the best ways to invest in emerging markets:

  1. Sign up to a share dealing platform – before investing in emerging markets, you’ll first need to open a brokerage account and deposit funds.
  2. Research emerging markets – do some research and decide if you want to invest in a single emerging market stock, or perhaps try to find the best emerging market funds and ETFs. Alternatively, you might want to choose an investment trust with a focus on a particular region.
  3. Decide how much to invest – make sure that the stock or emerging market fund fits in with the rest of your investment portfolio, then choose how many shares you want to buy.
  4. Buy the emerging market investment – after you’ve researched an emerging market investment and decided it’s the best option for you, just place an order to buy shares.

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All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.

How much should I invest in an emerging market?

The answer to this completely depends on your investing time frame, goals and appetite for risk. Putting your whole investment portfolio into emerging economies isn’t usually advisable because even the best emerging market funds can carry more risk than ones from developed countries.

Usually, the best thing to do is allocate a portion of your portfolio. Depending on how comfortable you are with this type of investment, you can allocate a higher or lower percentage. Research from Morgan Stanley suggests that between 6% and 39% is a suitable range for most investors to allocate to emerging markets.

Another tip is to look at global index funds and see how much of the investment goes towards emerging regions. Then, you can mirror this in your own portfolio. If you really can’t decide how much to invest in an emerging market, an alternative option is to simply make use of a global index fund that invests in both developed countries and emerging markets. This will automatically give you some balance.

Best-performing emerging markets investments

Finding the best emerging markets funds can be tough. This is partly because this area of investing can be more volatile than others, which means prices fluctuate on a regular basis and shift as the economy changes.

But to give you an idea of some of the best options available, we’ll reveal some of the top-performing emerging markets investments over the last few years.

Best emerging markets ETFs

Here are 5 of the best-performing emerging market ETFs along with their 3-year returns:

  1. Franklin FTSE Saudi Arabia ETF (FLSA) – 58.65%
  2. iShares MSCI Saudi Arabia ETF (KSA) – 51.95%
  3. iShares MSCI Qatar ETF (QAT) – 31.93%
  4. iShares MSCI UAE ETF (UAE) – 21.56%
  5. iShares MSCI Turkey ETF (TUR) – 13.25%

Best emerging markets funds

Here are 5 of the top-performing emerging market funds along with their 3-year returns:

  1. Artisan Developing World Fund – 68.24%
  2. ÖkoWorld Growing Markets 2.0 – 68.14%
  3. Morgan Stanley Emerging Leaders Equity Fund – 65.38%
  4. PGIM Jennison Emerging Markets Equity Opportunities Fund – 60.63%
  5. BNY Mellon Global Emerging Markets Fund Institutional – 59.27%

Best emerging markets investment trusts

And finally, these are 5 of the best emerging market investment trusts with the highest returns over a 3-year period:

  1. Gulf Investment Fund – 74.8%
  2. Mobius Investment Trust – 39.5%
  3. BlackRock Frontiers Investment Trust – 8.7%
  4. Fundsmith Emerging Equities Trust – 5.2%
  5. JPMorgan Emerging Markets Investment Trust – 4.4%

Advantages and risks of investing in emerging markets

Here’s a quick rundown of the main advantages of investing in emerging markets:

  • The investments can provide excellent growth opportunities for investors.
  • Most emerging markets are growing faster than developed regions.
  • There are loads of different types of emerging market investments to choose from.
  • It can be useful for portfolio diversification.

But there are drawbacks and risks, too. Here are some of the major concerns and downsides of emerging market investments:

  • Finding the best emerging market fund, ETF or investment trust can be difficult.
  • It can be a higher risk investment compared to developed markets.
  • The investments can be more sensitive to political and economic issues.
  • Investing at the wrong time can be costly due to the volatility.

Things to remember when investing in emerging markets

This area of investment can typically be a high-risk, high-reward option. Big price changes upwards or downwards also mean dealing with a lot of volatility, especially in the short term.

You should try and keep a long-term mindset with any investment, but this is even more true for emerging market investments. There are great potential gains to be had as a country or region develops. But this kind of economic development often takes years, if not decades.

Is it best to invest in one region or multiple markets?

Zoe Stabler

Finder expert Zoe Stabler answers

The answer to this will largely depend on the rest of your portfolio and where your money is invested. If you already have broad and diverse exposure to global markets, you may want to select one emerging region to invest into more heavily.

But, it’s important to check your current allocation. Because, you might find that if you’re investing in ETFs, funds and investment trusts, you may already have enough exposure to a particular emerging market.

If this is the case, it’s worthwhile making sure you’re not over-concentrating on just one area. Putting all your eggs into one emerging basket could mean your portfolio performance is heavily tied to just one place. Each emerging market fund will allocate investments differently, so always double-check to see where the bulk of the money is being invested. This will ensure you end up with a balanced portfolio that suits your goals.

Bottom line

Investing in emerging markets can be a very rewarding experience, but it’s also an area that requires you to tread carefully. Finding the best emerging market funds, ETFs and investment trusts can be a great way to get some broad exposure to these markets. However, it’s important to make sure you choose investments that fit the rest of your overall strategy. Don’t buy shares just based on past performance.

Some emerging markets will have already had a big boom, which means that buying based on past results could mean you’re investing at the top.

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