Emerging Markets - Funding?

An emerging market fund refers to a fund?that invests the majority of its assets in securities from countries with economies that are considered to be emerging. Funds specializing in emerging markets range from mutual funds to exchange-traded funds (ETFs). These countries are in an emerging growth phase and offer high potential returns with higher risks than developed market countries.

Emerging market funds typically specialize in fixed-income or equity securities from these regions.

How an Emerging Market Fund Works

The infrastructures and economies of emerging market nations vary broadly across the world. These countries are in high-growth phases with rapidly expanding and improving market environments.

Factors influencing their classification include macroeconomic conditions, rapidly increasing gross domestic product (GDP) rates, political stability, capital market processes, and financial market trading and settlement procedures. Many emerging market economies also experience significant growth from middle-class consumers who help to drive increased demand across business sectors.

An emerging market fund is a mutual fund or ETF that invests heavily in securities of varying asset classes—stocks, bonds, and other securities—from developing or emerging market economies. The most common places where these funds invest include India, China, Russia, and Brazil.

Emerging market funds seek to capitalize on the return opportunity presented by emerging market economies. Funds may invest in emerging market debt or equity to build a diversified fund offering for investors. Numerous debt and equity options are available for investors seeking to invest in a single country or a diversified portfolio of emerging market countries.

In the emerging markets category, investors will also find passive and active funds providing emerging market exposure across the market segment. Funds offer a range of options across the risk spectrum—currency risk, inflation risk, political risk, and liquidity risk, among others—and are generally attractive investments for growth investors.

Investors may want to consider the different risks—currency, inflation, politics, and liquidity—before investing in emerging market funds.

Country Classifications

Companies are typically categorized based on where their economies are in terms of development—developed, frontier, or emerging. Developed nations, also called industrial nations, have fully developed economies with technologically advanced infrastructure. Frontier economies are slightly less developed than a fully industrialized nation but a little more than an emerging economy.

Then there are the emerging market economies. As noted above, these countries offer higher returns with higher risk than developed market countries. They are usually considered more stable than frontier markets. Market index providers can identify emerging market countries and are defined by various characteristics.

The emerging markets also offer market segments that are attractive for investment. Asia ex-Japan emerging market funds include securities from Asia, excluding Japan. This region provides exposure to the Asian emerging markets. Similarly, BRICS funds will comprise Brazil, Russia, India, China, and South Africa securities. The BRICS countries are known to be five of the most dominant economies in the emerging markets.

In August 2023, BRICS invited six new countries to join: Saudi Arabia, United Arab Emirates (UAE), Iran, Egypt, Argentina, and Ethiopia.

Types of Emerging Market Funds

Here's a look at some of the most common types of securities that comprise emerging market funds.

Emerging Market Debt

Emerging market debt can offer the least risk among emerging market investments. Credit quality is a leading objective that differentiates emerging market debt funds, providing access to debt investments with varying levels of risk. Investors can invest in both passive and active funds. Leading indexes for passive market investment include the J.P. Morgan Emerging Market Bond Index and the Bloomberg Emerging Markets USD Aggregate Total Return Index.

Emerging Market Equity

Emerging market equity encompasses a broad range of companies from emerging markets worldwide. Investors can invest in passive indexes or seek actively managed funds for emerging market exposure. Top indexes include the MSCI Emerging Markets Index and the S&P Global Broad Market Index.

Examples of Emerging Market Funds

The American Funds Emerging Markets Bond Fund is a good investment for investors seeking exposure to emerging market debt. This Fund is actively managed and invests in emerging market government and corporate bonds. As of June 30, 2023, its most significant holdings were in Mexico, Brazil, and Indonesia.

The American Century Emerging Markets Fund is an example of an emerging markets equity fund. The Fund is actively managed and uses fundamental analysis to choose stock investments for the portfolio. As of July 31, 2023, the Fund's top countries were China, Taiwan, and India.

How Risky Are Emerging Market Funds?

Emerging market funds are inherently riskier than funds that invest in domestic equities or those of developed countries because emerging markets carry more risk. Emerging markets are still developing their economies and establishing industries, and they have other risks, such as political risks.

What Are the Largest Emerging Markets?

The largest emerging markets are considered to be the "BRIC" nations: Brazil, Russia, India, and China. Though South Africa is part of BRICS, its GDP is lower than other emerging market nations, such as Turkey and Indonesia. Other countries with large economies were invited to join BRICS in Aug. 2023. These countries are Saudi Arabia, the United Arab Emirates (UAE), Iran, Egypt, Argentina, and Ethiopia.

What Is the Best Way to Invest in Emerging Markets?

The best way to invest in emerging markets is to invest in exchange-traded funds (ETFs) or mutual funds with exposure to emerging markets. This allows for quick and easy investment diversification amongst emerging markets and removes the need to research every emerging market.

Final Comments:

Emerging market funds allow investors to gain access to emerging market investments, which can be an excellent way to diversify one's portfolio with the possibility of higher returns than some other investments. Investors should invest carefully when looking at emerging market funds as there is inherently higher risk in emerging markets.