How To Invest in Emerging Markets (2024)

Emerging markets are countries that are experiencing rapid economic growth and industrialization, but that do not have fully developed economies. 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 these markets has 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 this article, you’ll learn how to invest in emerging markets, as well as the risks you need to understand.

How To Invest in Emerging Markets in 4 Steps

Investing in emerging markets is pretty simple, even if you’re a beginning investor. All you need is a brokerage account to start investing in parts of the globe that are experiencing substantial growth. In fact, if you use a robo-advisor service, you already may be investing in these parts of the world, as some services will allocate part of your portfolio to emerging markets as part of a growth and diversification strategy.

1. Open an Account

To start investing in emerging markets, you’ll need an investment account. You could open an individual retirement account—either a Roth IRA or traditional IRA—through a brokerage firm. A taxable brokerage account is another option. Or if you have a 401(k) or another workplace-sponsored retirement account, you may have the option to allocate part of your investments to emerging markets, likely through a mutual fund.

2. Fund Your Account

Once you’ve opened an account, you’ll need to fund it. You can contribute up to $6,000 to an IRA for both 2021 and 2022, or $7,000 if you’re 50 or older. If you’re investing in a 401(k), you’ll fund your account through payroll deferrals. For most workplace plans, the contribution limit is $20,500 in 2022, or $27,000 for workers 50 and older. There’s no limit on contributions to a taxable brokerage account.

3. Decide on the Type of Investment

Now it’s time to research how you want to invest in emerging markets. Some options to consider:

• Emerging market stocks: One way to invest in emerging markets is to 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.
• 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 broker with international expertise.
• Emerging market mutual funds and ETFs: A good 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 less risk compared with individual stocks and bonds. 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. You can also invest in a fund that focuses on a specific country or segment of emerging markets. For example, the VanEck Russia ETF (RSX) invests in 29 Russia-based holdings. Or you also could invest in a fund that focuses exclusively on small-capitalization stocks or dividend stocks in emerging markets.
• 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.

4. Make Your First Investment

Once you’ve opened and funded your account and you’ve done your homework on available assets, it’s time to make your first emerging market investment. Just don’t forget about the tax consequences. If you sell any investments for a profit, you’ll be on the hook for capital gains taxes, unless you’re investing in a tax-advantaged account like an IRA.

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 December 2021. Meanwhile, average annualized returns as of Jan. 20, 2022, for the 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 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.
• Economic risk: Labor or materials shortages, inflation or deflation, unstable monetary policy, or insufficient regulation may threaten growth.
• 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.

Pros and Cons of Investing in Emerging Markets

Pros Explained

• 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 Explained

• 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.
• 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.
• Lower liquidity: One common way to invest in international stocks, 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.

How To Start Investing in Emerging Markets

Open an Account

To start investing in emerging markets, you’ll need to open a brokerage account or use an investment app. Some platforms allow you to start an account with no minimum, but to make your first purchase, you’ll need to either fund your account or connect it to your bank account.

You can open an account in a few minutes by providing some key information like your name, address, and Social Security or tax identification number. You also may need to provide information from a government ID, like a driver’s license or passport. You’ll likely be asked about your income and employment status, as well as some questions to determine your risk tolerance.

Decide Which Emerging Market Investments To Buy

The simplest way to invest in emerging markets is through an ETF or mutual fund. 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. If you invest in an ADR that’s listed on a U.S. stock exchange, the company is required to file information with the U.S. Securities and Exchange Commission and generally follow U.S. accounting rules.

Make Your First Transaction

Once you’ve selected your emerging markets investments, it’s time to make your first transaction. The SEC has a two-day settlement rule for most securities, which means security transactions must be completed within the trade date plus two business days, in other words, the T+2 rule.

If you’re trading an ETF or mutual fund that’s registered to a U.S. investment company that tracks emerging markets, the T+2 rule applies. The T+2 rule also applies to ADRs. However, if you’re buying emerging markets stocks through over-the-counter markets, check with the rules for the country where the company is based.

What To Watch Out for After You Invest in Emerging Markets

Emerging markets are often high-volatility investments. Consider whether you can handle large fluctuations before you decide to invest in these types of assets. With emerging markets, all the usual rules of investing apply. The goal is to buy low and sell high. That means you’ll often have to go against the herd. Don’t sell in a panic when bad news sends your investment tanking. Likewise, you don’t want to buy when everyone else is rushing to invest in emerging markets.

You also need to periodically review your investments. As your financial goals change, your ideal asset allocation will change as well. For example, if you’re in your 20s or 30s, you can typically afford to take more risk than you can when you’re a few years away from retirement. So you may want to invest more aggressively in emerging markets when you have a long time horizon, then shift toward more conservative investments.

Should I Invest in Emerging Markets?

There’s no one-size-fits-all answer here. Emerging markets can be a smart way to diversify your portfolio and capitalize on high-growth parts of the world. However, if you have a low risk tolerance or you may need your money in a couple of years, emerging markets may not be the best investment choice.

A good way to invest in emerging markets is to start small. You could limit a small amount of your portfolio—say, 5%—to emerging markets. As you get a feel for it, you can shift more of your investments to emerging markets if you decide investing in this way meets your needs.

Frequently Asked Questions (FAQs)

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circ*mstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.