Emerging Markets Stock Funds

Emerging markets stock funds provide a good means of expanding the breadth and depth of your international diversification. International investing used to be restricted mainly to the developed markets represented in the MSCI EAFE (Europe, Asia, Far East) index, but your opportunities go way beyond that now that the lesser-developed markets are rapidly developing.

Much of the prior subsection International Stock Mutual Funds is relevant to emerging markets stock funds. If you haven't read it, you may want to read it before proceeding with this subsection.

As noted in the prior subsection, investing in the equities of foreign companies is much different than investing in domestic companies and is best left to the experts. There are very few ADRs available for companies in the emerging markets and direct foreign investment by individuals is an impractical alternative for individuals. And currency risk is also an issue best dealt with by professionals. Currency risk is discussed in the prior subsection, so I won't repeat it here.

Just about everything stated in the prior subsection about international mutual funds also applies to the emerging markets funds, as they, too, are international. The two notable exceptions are Real Estate and Natural Resources.

I don't know of any emerging markets real estate funds, although there will undoubtedly be some before too long. You can participate in the Emerging markets real estate sector by selecting an international real estate fund that has substantial holdings in the Emerging Market countries.

So, too, Natural Resources. As much of the world's untapped natural resources are to be found in undeveloped or lesser developed countries, the companies that the international natural resources funds own tend to have substantial holdings and/or operations in the Emerging Markets countries.

There are emerging markets funds that are specific to various regions, such as Eastern Europe and Southeast Asia, and country-specific funds that invest in countries such as China and Russia. (China and Russia may be large countries, but their economies and capital markets are still emergent.)

The emerging markets countries are growing rapidly and the companies domiciled in the Emerging Markets countries are growing just as rapidly. However, due to a lack of stability in their economies and financial markets, and inexperience in the business community, emerging markets investments can be very volatile. Thus, funds that invest in the stock of emerging markets companies can be expected to serve up high but very volatile returns. That being said, consideration must be given to the evolution of the emerging markets.

As emerging markets countries develop viable capital markets and a middle class, demand is created internally and they become less dependent upon the economies of the countries to which they export their products. This tends to lessen the degree of correlation between emerging markets and the developed markets, a phenomenon known as decoupling. However, the group of countries classified as emerging markets countries is evolving. Those that develop sound capital markets and an enduring middle class will eventually be grouped with the countries with developed markets and newly emergent countries will be added to the group of emerging markets countries, thus reversing the effects of decoupling. So, although emerging markets do provide good diversification, the degree of diversification may not be as great as one might expect.

Emerging markets stock funds are excellent long-term investments that will help diversify your portfolio while offering high average long-term returns that are commensurate with their high volatility.

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Move on to the next subsection, Bond Mutual Funds.