In the past, I have written about how emerging markets could present an investment opportunity for many. Yes, the US markets have been in a serious bull market now for many years despite some pullbacks over the past two years. With the current trade issues that are coming out of Washington, there is no telling how these actions will affect the US markets either in the short or long-term. But one thing is fairly certain; emerging markets may provide an investment opportunity for those who can take some additional risks with their portfolios. As always, if you are not certain on how to go about doing this or have additional questions seek out a fee-only financial planner.
While the US is the largest economy on the world, we barely make up 4% of its population and thereby that leaves many opportunities for foreign markets to step up and make some inroads, in both developed and emerging markets. Now, most people have heard of the BRIC which stands for the four countries of Brazil, Russia, India, and China. And yes, these four countries do represent a major part of the world’s economies, especially with China being the second largest behind the US. While the BRIC may not hold the appeal, it had many years ago, the premise is still there and can be applied to other countries that are in the emerging market categories.
Consider that Western Europe and Japan have been growing at an annual rate of between 1.0% and 1.5%. That is not a recipe for outstanding growth in equities. And the US has not fared much better at 2.2% on average. But emerging markets have seen growth rates of 4% or higher. That means these countries are primed for some growth that the established countries may not see. And as these countries continue to invest in their infrastructure, education, and see stabilization in their economies and political systems, they can indeed be an investing opportunity. And again, these are riskier investments than one would expect from an established country or the US, but they can also have the outsized gains we may not experience here and in other developed nations.
But before you do invest in emerging markets, it is wise to know what it is you are investing in and how you will go about doing this. In many instances, you can invest in foreign companies right here in the US through the use of ADR listed companies. An ADR is when a company deposits shares with an American institution that enable it to be listed on a US-based exchange and thereby providing US investors an opportunity to buy shares in that foreign company. This is much easier than investing directly in a company in a foreign market. Another way is through the use of exchange-traded funds or ETF’s.
Now investing in an ETF is similar to investing in a mutual fund, but they are traded throughout the day like stocks on US markets. But not all ETF’s are created equally, and they have hundreds of investment options available to the average investor. Some of these ETF’s invest in numerous emerging markets through the use of Indexes such as Vanguard’s Emerging Market fund (VWO) with an extremely low annual fee of 0.18%. This fund invests the FTSE index, so it is heavily invested in China. Or you could go with a specific country that appeals to you and your tastes such as the iShares ETF that invests in Peruvian companies (EPU) with an annual expense ratio of 0.59%. No matter what ETF you invest in, it is important to look at the companies that make up the ETF and then look at the expense ratio it charges. You must make sure that the investing style of the ETF meets your investment goals and that the expense ratio is low enough as to not eat into your overall profits from the investment.
As a disclaimer, I do own both Vanguard Emerging Markets (VOW) and iShares All Peru (EPU) ETF’s, and while they are appropriate for me and my investment strategy, they are not suitable for you and yours. Always seek the advice of a fee-only financial planner and ensure that any investment meets your standards and investment strategy. As I do not know everyone’s financial goals and situation, these are not recommendations to buy the mentioned securities but rather ideas and tips to give you a starting point for reference.
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