Emerging markets can offer growth, but expect volatility.
As investors look to diversify away from traditional U.S. holdings, emerging markets can offer growth — but they can also be volatile. Some emerging-market countries are oil exporters, such as Brazil, which made them particularly vulnerable in 2020 because of the decline in oil prices. Despite these struggles, emerging markets have young demographics and growing middle-class populations, with the potential for greater growth than developed countries. “Emerging-market economies are starting at a lower level of development, which means they are positioned to deliver above-average returns,” says Charles Sizemore, chief investment officer of Sizemore Capital Management in Dallas. For investors seeking exposure to emerging markets, here are seven funds to buy and hold.
iShares Core MSCI Emerging Markets ETF (ticker: IEMG)
For comprehensive exposure to emerging markets, IEMG touches many global regions for portfolio diversification. IEMG’s equity markets asset class has more than 2,500 holdings, honing in more than 19% of its exposure in the information technology sector. The fund is up more than 4% year to date and 5.4% since its inception less than 10 years ago. A benefit of investing in emerging markets right now, at a time when the U.S. market is perceived to be overvalued by investors, is that there may be investment opportunities at a fairer price. “The consensus opinion in the capital markets is that interest rates are likely to rise in the near future,” says Robert Johnson, finance professor at Heider College of Business at Creighton University. Johnson further explains that, historically, in rising interest rate environments, emerging-market equities have outperformed U.S. equities.
Trailing one-year return: 36.2%
Expense ratio: 0.11%
Fidelity Emerging Markets Fund (FEMKX)
The focus of FEMKX is a diversified equity strategy to emerging markets for capital appreciation. The Fidelity team selects companies with strong potential for growth, an established record of consistent cash flow and high returns. Not only is this fund regionally diversified across emerging and developed markets, but there are a variety of different market sectors represented, ranging from information technology and health care to industrials and real estate, among several others. The fund’s exposure to the emerging Asia market accounts for more than 67% of its portfolio. This distribution may be attractive to investors who believe this region could perform well this year since it has demonstrated a swifter recovery from the pandemic than other global regions.
Trailing one-year return: 47.8%
Expense ratio: 0.92%
Vanguard FTSE Emerging Markets ETF (VWO)
Compared with its fund competitors, VWO has a low expense ratio, an attractive feature for investors worried about high fees. Investors can access the fund’s more than 5,000 emerging-market stocks of total net assets valued at more than $108 billion. Top holdings include Taiwan Semiconductor Manufacturing (TSM), Tencent Holdings and Alibaba Group Holding (BABA). VWO’s broad exposure offers wide diversification across various countries including Brazil, Russia, India, Taiwan and China to mitigate volatility from poor-performing stocks. While market volatility is accompanied by risk, it also provides the opportunity to generate higher returns. “The less diversified a fund is, the greater the price swings are likely to be,” Sizemore says. That’s not always bad, of course, he explains. “Being overweight (in) a country that ends up outperforming is clearly positive.”
Trailing one-year return: 32.4%
Expense ratio: 0.1%
American Funds New World Fund (NEWFX)
NEWFX has a low minimum fund investment of $250. The U.S. equity market accounts for about 22% of the fund’s portfolio, with about a 44% exposure to emerging markets. The portfolio is divided into segments managed by 12 fund managers that manage NEWFX’s assets, with many years of combined industry experience. Some of the factors investment advisors use to qualify countries include the overall regulatory environment, market capital as a percentage of gross domestic product and restrictions on repatriation of initial capital. Developing countries in the fund include Argentina, Bahrain, Brazil, Chile, the Philippines, Romania, Saudi Arabia and many others.
Trailing one-year return: 38.2%
Expense ratio: 1%
Vanguard Emerging Markets Bond Fund (VEMBX)
VEMBX only has a five-year track record, but it has handily beaten its peers in the emerging-market bond category and its benchmark, the JPMorgan EMBI Global Diversified Index. Although bonds traditionally see less volatility than the stock market, emerging-market bonds may offer higher potential yields. The fund’s holdings include sovereign debt — issued or guaranteed by foreign governments, agencies and political subdivisions — as well as debt securities issued by corporations. Its total net assets are valued at just less than $2 billion. About 35% of the fund’s assets are rated with a “BBB” credit rating, which is considered investment-grade, but a majority of the fund’s holdings are of lower quality. Lower-rated bonds are generally riskier but can generate a higher yield.
Trailing one-year return: 10.25%
Expense ratio: 0.6%
T. Rowe Price Emerging Market Stock Fund (PRMSX)
Investors looking to take a more aggressive strategy with long-term diversification benefits may look to PRMSX. The fund’s top 10 holdings account for about 49% of the overall portfolio with some big names including Taiwan Semiconductor Manufacturing, Tencent Holdings, Samsung Electronics, Alibaba Group Holding, AIA Group and others. Frank Lee, managing director at Miracle Mile Advisors in Los Angeles, says that emerging-market equities have attractive attributes compared to their developed market counterparts, considering their cheaper valuations and higher yields. But to realize these growth rates, Lee explains, an investor needs to have a long-term time horizon and not be too concerned with short-term volatility. As these emerging markets continue to develop, investors can benefit from potential growth opportunities.
Trailing one-year return: 31.95%
Expense ratio: 1.21%
Schwab Fundamental Emerging Markets Large Company Index Fund (SFENX)
Unlike several other emerging-market funds on this list, SFENX holds most of its sector weight in financials, with about 26% in the sector, along with 18% toward energy and 16% in information technology, among other sectors. The fund, in general, corresponds to the returns of the Russell RAFI Emerging Markets Large Company Index, which is designed to capture the beta, or the measure of a stock’s volatility relative to the overall market, for a fundamental index strategy. SFENX has slightly more than $730 million in assets, with exposure to more than 300 holdings. At the end of 2020, the fund had a price-earnings ratio of 11.7, lower than the MSCI Emerging Markets Index P/E ratio of 19.48. “The case for investing in emerging-market funds is clear — a bigger opportunity set, higher growth rates and improved diversification,” says John Bussel, chief investment officer at Team Hewins.
Trailing one-year return: 17.7%
Expense ratio: 0.39%
Emerging-market funds to buy and hold:
— iShares Core MSCI Emerging Markets ETF (IEMG)
— Fidelity Emerging Markets Fund (FEMKX)
— Vanguard FTSE Emerging Markets ETF (VWO)
— American Funds New World (NEWFX)
— Vanguard Emerging Markets Bond Fund (VEMBX)
— T. Rowe Price Emerging Market Stock Fund (PRMSX)
— Schwab Fundamental Emerging Markets Large Company Index Fund (SFENX)
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Update 03/23/21: This story was published at an earlier date and has been updated with new information.