Be sure to also see our Beginner’s Guide to International Mutual Funds.
What Are Emerging Markets?
Most of the countries that meet the criteria for this definition are experiencing rapid and substantial economic expansion. Some examples of this include China, Brazil, Mexico, India and Russia. Needless to say, the combined potential for growth in just these countries is staggering. In many respects, these countries represent the future of global GDP because of their continued potential for expansion. The populations of these countries represent vast markets for foreign products (such as from the U.S.) as their median incomes continue to rise.
Take our quiz – Which Country Has a Higher GDP?
Invesing in Emerging Market Funds
Emerging market funds can also add a substantial measure of diversification to a portfolio, as they have a considerably lower correlation to our markets than more developed overseas sectors. Some mutual funds of this type purchase securities from issuers in emerging markets, and these will typically fall into the high-yield category, as their holdings tend to carry a higher risk of default. It is important to note that emerging markets mutual funds of any type also come with some fairly unique risks that do not apply to domestic funds. Political actions and domestic unrest can substantially impact the returns that investors receive, and a radical change in leadership or policy can easily result in unexpected gains or losses for investors.
Foreign currency exchange rates can play a major role in the performance of these funds as well. Some funds focus on specific segments of the market as a whole (i.e. common stock, secured debts, etc.), while others concentrate on a specific region, such as the developing countries in the Far East or South America. There are also both open-ended and exchange-traded funds that invest solely in individual countries; the ETFs that do this typically hold the entire basket of securities that are traded on that country’s largest stock exchange. Investors who hold these funds may also have to pay tax on foreign income that is reported to them on the 1099-DIV and 1099-INT forms.
See also a Beginner’s Guide to Currency Mutual Funds.
Benefits of Investing in Emerging Markets with Mutual Funds
Examples of Emerging Market Funds
- Van Eck Emerging Markets A (GBFAX) – This large-cap growth fund invests heavily in stocks outside the U.S. with a concentration in the financial and technology sectors. It charges a maximum sales load of 5.75%, and Morningstar classifies its annual expense fees as below average and gives this fund 3 stars.
- Wells Fargo Advantage Emerging Markets Equity A (EMGAX) – Morningstar gives this fund 3 stars as well and also classifies its annual expenses as below average. It also charges a maximum load of 5.75%, but this fund falls into the large-cap blend category. While its portfolio is also heavily invested in the financial services sector, it has a higher concentration of defensive consumer staples than technology.
- Invesco Developing Markets A (GTDDX) – This fund is currently awarded 4 stars by Morningstar and charges a maximum 5.5% sales load with low annual fees. This large-cap blend fund is by far the most heavily concentrated in financial services holdings.
- Vanguard Emerging Markets Stock Index Fund (VEIEX) – This no-load large cap blend fund has been given 3 stars by Morningstar and boasts exceptionally low annual expenses. Its portfolio is also most heavily concentrated in the financial and technology sectors.
The Bottom Line
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