This guide explains what they are, why they can be worth considering, and how to invest in emerging markets even if you’re a beginning investor.
The biggest attraction of investing in emerging markets is the potential for high returns. Between 1969 and 2019, the U.S. economy grew by 3.8 times in terms of gross domestic product (GDP). Compare that to China (GDP growth of 73.6 times), South Korea (GDP growth of 28.2 times), and India (GDP growth of 14.1 times) during the same period.
Emerging markets can be one way to diversify your portfolio in an attempt to capitalize on high-growth parts of the world. However, Emerging markets are often high-volatility investments. Consider whether you can handle large fluctuations before you decide to invest in these types of assets.
How To Start Investing in Emerging Markets - Quick Guide
- Open Your Account: To start investing in emerging markets, you’ll need to open a brokerage account or use an investment app. CAPEX.com allows you to start an account with as low as $100.
- Define Your Strategy: Decide on the type of investment (equities, debt, or a combination) and choose what type of exposure you want to gain: whether that is broad or to a specific country or sector.
- Place Your Transaction: Make your first investment using a share dealing account, or trade using CFDs.
What is an emerging market?
An emerging market economy is an economy that's transitioning into a developed economy. Emerging market economies typically feature a unified currency, stock market, and banking system; they're in the process of industrializing.
In a nutshell, the defining characteristic of an emerging market from an investor’s point of view is that it offers faster growth than advanced markets, but it also carries more risk and tends to be more volatile. Below is a list of some typical characteristics:
- They are going through a period of industrialization and experiencing above-average economic growth, but with below-average per capita income (relative to advanced economies)
- They have fast-growing populations and an emerging middle-class
- Their currency tends to be exposed to more volatile swings with currencies of advanced economies, particularly the US dollar
- They are often trying to reform their exchange rate mechanisms to increase the stability of their currencies to discourage citizens from sending their money overseas and encourage investment from abroad
- They have implemented plans to reform the economy, usually toward an open market one that engages more with the rest of the world
- They are attempting to introduce greater accountability and transparency into the economy and financial system to build confidence among foreign investors
The four largest emerging markets are “BRIC” countries, i.e., Brazil, Russia, India, and China. The “CIVETS” countries—Cambodia, Indonesia, Vietnam, Egypt, Turkey, and South Africa—are emerging markets expected to rise in prominence over the coming years.
As of 2021, about 6.2 billion people, or roughly 78% of the world’s population, lived in emerging market countries. Investing in emerging markets could have tremendous potential for growth as these countries make strides in economic development, income, education, life expectancy, and expansion of the middle class.
However, emerging markets are risky compared with investing in developed countries. In the next sections, you’ll learn how to invest in emerging markets, as well as the risks you need to understand.
How to invest in emerging markets
For investors, the purpose of emerging markets is to gain exposure to greater risk for greater reward. that emerging markets can grow faster than advanced economies, but this growth can be more volatile and vulnerable. Compared to advanced economies, emerging markets are more likely to start pedaling backward and could see the reintroduction of political or economic uncertainty
Now it’s time to detail some of the most popular ways to invest in emerging markets.
1. Emerging market stocks
One way to invest in emerging markets is to either trade stocks or buy stocks in countries with rapidly developing economies. Some international stocks trade on U.S. stock exchanges, often through American depositary receipts (ADRs). An ADR represents one or more shares of a foreign stock and is bought and sold like a domestic stock. Some ADRs trade on over-the-counter markets instead of the New York Stock Exchange (NYSE) or Nasdaq.
Some of the best emerging market stocks to buy based on the number of hedge fund holders are:
Best Emerging Market Stocks: JinkoSolar (JKS)
According to analysts quoted by Yahoo Finance, the EU’s solar capacity could triple above its current levels by 2026, as by 2029, the EU wants renewables to generate 45% of all its energy. Meanwhile, China is expected to add 95 to 120 gigawatts (GW) of solar power in 2023. That’s a huge amount of solar power. All of that is great news for JinkoSolar, as China and Europe together accounted for over 65% of its revenue in the fourth quarter of last year.
Best Emerging Market Stocks: ICICI Bank (IBN)
The Indian economy is expected to grow by 6% in the year that ends in March 2024, according to World Bank and IMF. That’s a very large increase, even though it’s below the 6.9% rate at which the Asian country grew over the last year. Also noteworthy is that Apple (AAPL) is reportedly moving a significant amount of its manufacturing business to the country and that India is slated to overtake China as the country with the world’s highest population this year. Those developments, along with the perception of geopolitical tension between the U.S. and China, may spur many more U.S. companies to move their manufacturing operations from China to India and support businesses like ICICI Bank.
Best Emerging Market Stocks: MercadoLibre (MELI)
The growth of MercadoLibre, a Latin American e-commerce company, was quite explosive, as its gross merchandise volume (GMV) jumped 35% year-over-year, excluding currency fluctuations in the last quarter of 2022. In recent weeks, multiple Wall Street analysts have been quite bullish on MELI stock. Morgan Stanley is convinced that the growth of MELI’s GMV will continue to exceed that of its peers. After studying the company’s “commerce and fintech ecosystem,” the bank believes that the company's profit outlook is “underappreciated.”
Best Emerging Market Stocks: Li Auto (LI)
The deliveries of Li Auto, a Chinese electric vehicle maker, soared 89% year-over-year last month and 66% in the first quarter. The automaker has a huge presence in China, with 299 dealerships spread across 123 cities. Also encouragingly, Li appears to be making progress on autonomous driving, as it’s testing a self-driving system that it intends to unveil later in 2023. The automaker expects the system “will be able to function without high-precision maps and, more importantly, to perceive, decide, and plan in real-time like a human driver.”
Best Emerging Market Stocks: JD.com
Headquartered in Beijing, JD.com is a leading supply chain-based technology and service provider. Despite the COVID-led multiple headwinds leading to a profound change in consumption patterns, JD.com has been able to consistently outperform the industry based on stronger control across its supply chains and entire business processes.
2. Emerging market funds
A popular option for investors seeking to diversify is to invest in emerging market mutual funds or exchange-traded funds (ETFs). Both give you a basket of securities—often hundreds or more—so there’s a popular alternative to individual stocks and bonds. You can buy a fund that invests broadly across emerging markets with thousands of holdings across the globe.
You can also invest in a fund that provides exposure to a specific country or segment of emerging markets. For example, the iShares MCSI Frontier and EM ETF (FM) invest in 7 Romania-based holdings. Or you also could invest in a fund that focuses exclusively on small-capitalization stocks or dividend stocks in emerging markets.
When choosing an emerging market ETF, it is important to choose one that you as an investor are comfortable with, understand the risks of the countries the ETFs invest in, as well as the cost of investing in the ETF.
Some of the best-emerging market ETFs to buy based on assets under management, average volumes, and holdings are:
Largest Emerging Market Funds: Vanguard FTSE Emerging Markets ETF (VWO)
You can buy a fund that invests broadly across emerging markets, like the Vanguard FTSE Emerging Markets ETF (VWO), which has more than 5,300 holdings across the globe and total net assets of almost $100 B. The top company holdings include Alibaba Group, Taiwan Semiconductor Manufacturing, Samsung, and Tencent Holdings.
Most Liquid Emerging Market Funds: iShares MSCI Emg Markets ETF
Investment manager, Blackrock, whose iShares investment funds have been incredibly popular, offers plenty of emerging market ETFs, such as the iShares MSCI Emerging Markets ETF (EEM), which tracks the MSCI Emerging Market Index.
Volatile Emerging Market Funds: iShares MSCI Frontier and Select EM ETF (FM)
The iShares MSCI Frontier and Select EM ETF seeks to track the investment results of an index composed primarily of frontier market equities along with select emerging market equities, including 7 of the most popular Romanian stocks listed on the Bucharest Stock Exchange and included in the BET index: Banca Transilvania (BVB: TLV), OMV Petrom (BVB: SNP), Romgaz (BVB: SNG), BRD (BVB: BRD), Transgaz (BVB: TGN), Electrica (BVB: EL), and TeraPlast (BVB: TRP).
Country-Specific Emerging Market Funds: iShares MSCI Saudi Arabia ETF (KSA)
The iShares MSCI Saudi Arabia ETF seeks to track the investment results of a broad-based index composed of Saudi Arabian equities, which has historically been closed to foreign investors. Some of the top Saudi stocks included are Aramco – one of the largest companies in the world, leading banks like Arab National Bank (Alahli), Al Rahji, and Riyad, petrochemical companies like SABIC, telecom companies like STC, or mining companies like Ma'aden.
3. Emerging market REITs
Investing in a real estate investment trust (REIT) is like investing in a real estate-focused mutual fund or ETF. An emerging market REIT could be a good option if you want to invest in real estate in economically emerging parts of the globe.
Best Emerging market REITs: MSCI Emerging Markets IMI Core REIT Index (USD)
The MSCI Emerging Markets IMI Core REIT Index is a free float-adjusted market capitalization index that consists of large, mid, and small-cap stocks across 24 Emerging Markets (EM) countries engaged in the ownership, development, and management of specific core property type real estate.
Best Emerging market REITs: iShares Asia Developed Real Estate ETF (IFAS)
This emerging market REIT from iShares which tracks the FTSE EPRA/NAREIT Developed Asia Index. Investors should be aware that the iShares Asia Developed Real Estate ETF is invested in real estate stocks or REITs from more developed countries or markets like Australia, Hong Kong, Japan, and Singapore.
4. Emerging market bonds
Another option is to invest in bonds issued by governments or corporations in emerging market countries. When you buy bonds, you become a creditor. You receive fixed interest payments until the bond reaches its maturity date, at which point you get your principal back. Investing in emerging market bonds comes with additional risks, including currency risk. You’ll also need a stockbroker with international expertise.
Best Emerging Markets Bonds: The Vanguard Emerging Markets Government Bond ETF
This top emerging market bond allows you to gain exposure to US dollar-denominated government bonds in emerging economies. Over 60% of the portfolio is made up of emerging market debt, with Mexico, Indonesia, and Saudi Arabia among the three biggest components.
Best Emerging Markets Bonds: The iShares J.P. Morgan $ Emerging Markets Bond UCITS ETF - SEMB
SEMB also tracks US dollar-denominated debt in emerging markets, with investment grade and high-yield government and quasi-government bonds.
Best Emerging Markets Bonds: The SPDR Bloomberg Barclays Emerging Markets Local Bond UCITS ETF
It is designed to provide a broad measure of the performance of liquid local currency emerging markets debt, and limits exposure to an individual country to 10%.
What You Need to Know Before Investing in Emerging Markets
While past performance doesn’t guarantee future results, it’s also important to consider that emerging markets have underperformed compared with U.S. stocks in recent years. The MSCI Emerging Markets Index, which tracks the performance of more than 1,400 stocks across 25 emerging market countries, had yielded average annual returns of 5.49% over the past 10 years as of 2022. Meanwhile, average annualized returns as of 2022, for the USA500 index were 13.04% over the past decade.
Understand the Risks of Investing in Emerging Markets
Emerging markets offer serious potential growth for investors. But they’re also riskier than investing money in developed markets. As with any investment, there’s the risk that an individual company could fail or that a stock market will crash. But with emerging markets, the following types of risks are substantially higher:
Political risk
The chance that political instability or corruption will impede economic progress and reduce profitability.Currency risk
A currency’s value could tank, which can significantly reduce investment gains. This is a significant risk in emerging market countries, where currencies are often unstable.Economic risk
Labor or materials shortages, inflation or deflation, unstable monetary policy, or insufficient regulation may threaten growth.
Pros of Investing in Emerging Markets
High growth potential
The biggest advantage of investing in emerging markets is the potential for high returns. Between 1969 and 2019, the U.S. economy grew by 3.8 times in terms of gross domestic product (GDP). Compare that to China (GDP growth of 73.6 times), South Korea (GDP growth of 28.2 times), and India (GDP growth of 14.1 times) during the same period.Diversification
Putting a percentage of your investments in emerging markets provides a more diverse portfolio than investing solely in U.S. stocks and bonds. Some financial institutions recommend allocating as much as 40% of your stock investments into international stocks and up to 30% of your bond investments in international bonds.*
*Note that this allocation includes both developed and emerging markets.
Cons of Investing in Emerging Markets
Higher risk
The potentially greater returns possible with emerging markets also come with higher risks. Currency fluctuations, the chance of political instability and corruption, and a lack of infrastructure all can lead to bigger risks.Lower liquidity
One common way to invest in Chinese stocks and international stocks in general, including those in emerging markets, is through ADRs. But some ADRs have low liquidity, meaning they’re not easily converted to cash. This can lead to high bid/ask spreads. Liquidity risk is also high for emerging markets stocks that don’t have an ADR and trade on over-the-counter markets instead of via a major U.S. stock exchange.Lack of information
Data about emerging markets can be difficult to obtain. Government data is sometimes unreliable or outdated. Interpretations of data can vary widely and are subject to cultural biases.
Start Investing in Emerging Markets with CAPEX.com
- Open and Fund Your Account: You can open an account in a few minutes by providing some key information like your name, address, income, and employment status, as well as some questions to determine your risk tolerance. Upload documents to verify your account and fund it using one available option in your country.
- Decide on the Type of Investment: The simplest way to invest in emerging markets is through an ETF. You get instant diversification, plus you can avoid some of the complexities that come with individual emerging market stocks and bonds. Regardless of how you decide to invest in emerging markets, do your research.
- Place Your First Order: Make your first investment using a share dealing account, or trade emerging markets shares, indexes, ETFs, bonds, or currencies using CFDs. If you want to try out your strategy risk-free then you can begin with a Demo Account.
Free resources
Before you start investing in emerging markets for your portfolio, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of free trading courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you become a better trader or make more informed investment decisions.
Our demo account is a suitable place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how CFDs work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged trading.