Best Ways to Invest in Emerging Markets
The best way for most people to start with emerging markets investing is through a diversified Exchange-Traded Fund (ETF). These funds offer low-cost access to hundreds of companies across many developing countries, reducing your risk.
Quick Picks: Top Ways for Emerging Markets Investing
Looking for a fast answer? Here are the best ways to add the growth potential of developing economies to your portfolio. We rank them based on ease of use, cost, and diversification.
| Rank | Investment Method | Best For |
|---|---|---|
| #1 | Diversified Emerging Market ETFs | Beginners & Most Investors |
| #2 | Actively Managed Mutual Funds | Hands-Off Investors |
| #3 | Single-Country ETFs | Targeted Bets |
How We Chose the Best Emerging Market Investments
Investing in countries with fast-growing economies can be exciting. But it also comes with unique challenges. We focused on methods that balance growth potential with risk management. Our choices are based on a few simple ideas:
- Accessibility: You should be able to invest easily through a standard brokerage account. No complicated paperwork or foreign bank accounts needed.
- Diversification: The best options spread your money across many companies and countries. This helps protect you if one company or economy struggles.
- Cost: High fees can eat into your returns over time. We favor low-cost options like ETFs.
- Risk Management: While all investing has risk, some methods are much riskier than others. We prioritize strategies that help manage the extra volatility of emerging markets.
The Best Ways for Emerging Markets Investing, Ranked
Ready to explore your options in more detail? Here is our ranked list of the best ways to invest in emerging markets, from the simplest to the most complex.
Diversified Emerging Market ETFs
This is our top pick for a reason. An Exchange-Traded Fund (ETF) is a basket of stocks that trades on an exchange, just like a single stock. A diversified emerging market ETF holds shares in hundreds, sometimes thousands, of companies across dozens of developing countries.
Why it's good: It is the cheapest and easiest way to get instant diversification. With one purchase, you own a small piece of the biggest companies in countries like China, India, Brazil, and Taiwan. This spreads out your risk automatically. If one country's market has a bad year, your investment is supported by the others.
Who it's for: This is the perfect starting point for almost everyone, especially beginners. If you want a simple, low-cost, “set it and forget it” way to add emerging markets to your portfolio, this is it.
Example: A hypothetical emerging market ETF might hold stocks like Taiwan Semiconductor Manufacturing Co. (Taiwan), Tencent Holdings (China), and Reliance Industries (India). Your single investment gives you exposure to technology, e-commerce, and energy leaders across Asia.
Actively Managed Mutual Funds
An actively managed mutual fund is also a basket of stocks, but it's run by a professional fund manager or a team. Their job is to research and pick stocks they believe will perform better than the overall market. They actively buy and sell stocks to try and get you a higher return.
Why it's good: A skilled manager might be able to spot opportunities or avoid risks that an automated index fund (like an ETF) cannot. In the complex world of emerging markets, having an expert can sometimes be a big advantage. You can learn more about how economies are classified from organizations like the World Bank.
Who it's for: Investors who are willing to pay higher fees for the chance of beating the market. If you believe a professional can navigate the political and economic risks of emerging markets better than an index, this could be a good choice for you.
Single-Country ETFs
Instead of buying a fund that covers all emerging markets, you can buy an ETF that focuses on just one. For example, you could buy an ETF that only invests in Brazilian stocks or one that only holds stocks from South Korea.
Why it's good: This strategy allows you to make a targeted investment. If you have done your research and strongly believe that India's economy, for example, is set for a decade of massive growth, you can invest directly in that story.
Who it's for: This is for more experienced investors. It is much riskier than a diversified fund. If you are wrong about the country's prospects, your investment could suffer badly. It requires more research and a higher tolerance for risk.
American Depositary Receipts (ADRs)
An American Depositary Receipt (ADR) is a certificate that represents shares of a foreign company. These certificates are traded on U.S. stock exchanges, making it easy for you to buy and sell them just like you would a domestic stock.
Why it's good: ADRs give you a direct way to invest in a specific foreign company without the hassle of using a foreign stock exchange. You can own a piece of a popular Chinese e-commerce giant or a Brazilian mining company easily.
Who it's for: Stock pickers. This is the most concentrated and riskiest approach. It's for investors who enjoy doing deep research into individual companies and are comfortable with the high risk of owning single stocks.
Understanding the Risks of Investing in Developing Economies
The potential for higher returns in emerging markets comes with higher risks. It is vital to understand them before you invest.
- Currency Risk: Your investment is in a foreign currency. If the U.S. dollar gets stronger against that currency, your investment will be worth less when converted back.
- Political Risk: Developing countries can have less stable governments. A sudden change in laws, regulations, or leadership can negatively impact the stock market.
- Market Volatility: These markets often experience bigger price swings, both up and down, than developed markets. You must be prepared for a bumpier ride.
Is Emerging Markets Investing Right for You?
Investing in emerging markets can be a powerful way to boost your portfolio's long-term growth. However, it is not for everyone. It is best suited for investors with a long time horizon—at least five to ten years. This gives your investments time to recover from any short-term volatility.
Most experts agree that emerging markets should be a smaller part of a well-balanced portfolio. Think of it as a satellite holding that adds growth potential to a core of more stable investments from developed markets. For most people, starting with a diversified, low-cost ETF is the smartest and simplest path forward.
Frequently Asked Questions
- What is the safest way to invest in emerging markets?
- The safest way is typically through a broad, diversified emerging market ETF. This spreads your investment across many countries and companies, reducing the risk of any single one performing poorly.
- How much of my portfolio should be in emerging markets?
- Most financial advisors suggest allocating 5% to 15% of your total investment portfolio to emerging markets. The exact amount depends on your age, risk tolerance, and financial goals.
- Are emerging markets a good investment now?
- Emerging markets offer high growth potential but also come with higher risk. They can be a good long-term investment as part of a balanced portfolio, especially for investors who can tolerate market volatility.
- What are the main risks of emerging market investing?
- The main risks include currency fluctuations (your investment's value changing due to exchange rates), political instability, and higher market volatility compared to developed economies.