Investments in emerging market economies generally carry a higher degree of risk than assets in the U.S. The risks inherent to many diversified emerging market mutual funds include emerging markets risk, stock market risk, country risk, regional risk, currency risk, political risk, and active management and indexing risk in some cases. Emerging market mutual funds tend to offer higher potential returns over the long term to compensate for the high degree of risk and volatility.
Key Takeaways
- A developing or emerging market is an economy that’s growing and has developing industries that are engaging with global markets.
- Investments in emerging markets are typically considered riskier than investments in developed economies like the U.S. and Europe.
- Emerging markets mutual funds offer the opportunity to participate in developing economies while limiting some risk through diversification.
- American Funds New World Fund (Class A), Vanguard Emerging Markets Stock Index Fund, T. Rowe Price Emerging Markets Stock Fund, and Invesco Developing Markets Fund (Class A) are examples of emerging markets mutual funds.
- Long-term investors seeking growth opportunities and who have a higher tolerance for risk might want to consider investing in emerging markets funds.
Emerging Markets Stocks
Diversified emerging market mutual funds provide investors with professionally managed exposure to companies doing business in rapidly developing foreign markets. They invest primarily in the common stocks of companies headquartered in countries such as China, Brazil, Russia, and India. The funds may also invest in debt securities or bonds issued by governments, government agencies, and corporations based in these countries.
The definition of “emerging market economy” varies with world events. Egypt and Turkey were both on the radar of many emerging market investors but they’ve been driven off many lists in a relatively short period. These rapid changes may speak to the need for professionally managed exposure to emerging markets and also to the risk tolerance required by those who invest in them.
These four mutual funds spread their investments broadly enough that they can’t get utterly devastated by tomorrow’s news. They don’t just invest directly in the companies of emerging markets. They also invest in companies that do business in emerging markets.
China’s GDP of $17.79 trillion as of 2023 data made it the second-largest economy in the world after the United States.
The American Funds New World Fund Class A (NEWFX)
The American Funds New World Fund, Class A (NEWFX) seeks to provide long-term capital appreciation by primarily investing in common stocks of companies domiciled in emerging market economies. NEWFX was issued on June 17, 1999 by American Funds Distributors, Inc. It had $64.95 billion in total net assets as of Sept. 30, 2024 and was advised by Capital Research and Management Company. NEWFX charges an expense ratio of 0.99%.
NEWFX normally invests at least 35% of its total net assets in equity and debt securities of issuers based primarily in countries the fund’s adviser deems to be emerging market economies. NEWFX allocated 21.2% of its portfolio to the United States, 13.6% to China, 5.4% to Brazil, 14.5% to India, 2.4% to Japan, and 5.3% to France as of Sept. 30, 2024.
Financials has the largest weight of any sector, accounting for 17.3% of the portfolio, followed by information technology, consumer discretionary, and industrial stocks.
NEWFX is best suited for highly risk-tolerant investors with a long-term investment horizon who seek exposure to stocks and bonds in emerging market economies.
The Vanguard Emerging Markets Stock Index Fund (VEMAX)
The Vanguard Emerging Markets Stock Index Fund (VEMAX) was launched on June 23, 2006 by Vanguard. A minimum investment of $3,000 is required to invest. VEMAX charges a low expense ratio of just 0.14% like most Vanguard funds relative to the average expense ratio of diversified emerging market funds.
The fund is managed by the Vanguard Equity Index Group and seeks to provide investment results corresponding to the performance of the FTSE Emerging Markets All Cap China A Inclusion Index, its benchmark index.
VEMAX implements an indexing strategy to achieve its investment objective. Under normal market conditions, the fund invests a sampling of its total net assets in common stocks of companies included in the FTSE Emerging Markets All Cap China A Inclusion Index.
VEMAX had total net assets of more than $116.1 billion as of Sept. 30, 2024. The fund is heavily weighted toward China (29.9%), India (24%) and Taiwan (19.5%). Its biggest holdings are Taiwan Semiconductor, Tencent, and Alibaba.
The fund is seen as a high-risk, high-reward investment that’s best suited to long-term investors with high degrees of risk tolerance and who seek to gain exposure to common stocks of companies domiciled in developing countries. VEMAX is also suitable for investors who seek to diversify their portfolios.
The T. Rowe Price Emerging Markets Stock Fund (PRMSX)
The T. Rowe Price Emerging Markets Stock Fund (PRMSX) was issued on March 31, 1995. It seeks to provide investors with long-term capital appreciation by investing in undervalued common stocks of companies domiciled in developing countries. PRMSX is advised by T. Rowe Price Associates, Inc. and sub-advised by T. Rowe Price International Ltd. The fund charges an annual expense ratio of 1.16%.
PRMSX invests at least 80% of its total net assets in common stocks of emerging market companies under normal market conditions. The fund implements a growth strategy and selects companies based on their capabilities of sustaining long-term earnings growth, cash flows, and book values. PRMSX had total net assets of $5.4 billion as of Sept. 30, 2024.
PRMSX is heavily weighted toward China (26.5%), India (18.4%), Taiwan (15.71%), and Brazil (7.61%). Although the fund offers diversified exposure to many sectors, it is heavily weighted toward common stocks of companies in the financial and information technology sectors, which make up almost 50% of its portfolio.
PRMSX is best suited for long-term, highly risk-tolerant growth investors who want to gain exposure to undervalued common stocks of companies in emerging countries. Investors might consider PRMSX if they want to add diversification to their portfolios while potentially generating high returns over the long run.
Invesco Developing Markets Fund, Class A (ODMAX)
The Invesco Developing Markets Fund, Class A (ODMAX) was issued on Nov. 18, 1996. The fund is advised by Invesco Advisers. Investors must put a minimum of $1,000 into this portfolio and are charged an annual net expense ratio of 1.26%. The fund had $19.93 billion in portfolio assets on Sept. 30, 2024.
It mainly invests in common stocks of companies in developing and emerging market economies. It normally invests at least 80% of its total net assets in equity securities of companies with business activities in developing markets. Its manager seeks to achieve its investment objective by investing in common stocks of emerging companies expected to grow at a faster rate than world gross domestic product (GDP).
Stocks from China account for 21.3% of the portfolio. India (18.2%), Taiwan (14.3%), and Mexico (8.5%) are the next largest holdings. More than half the portfolio is invested in information technology, consumer discretionary, and financials.
The Invesco Developing Markets Fund, Class A fund is also best suited for growth investors with long-term investment horizons and who seek capital appreciation by investing in a portfolio of equity securities in developing and emerging markets economies.
How Does a Mutual Fund Work?
A mutual fund accepts money from numerous investors and uses it to build a portfolio in which each investor “mutually” shares profits and losses. The portfolio is professionally managed on the investors’ behalf. Transaction costs are typically investor-friendly.
What Is a Debt Security?
Debt securities include corporate and government bonds, preferred stock, and some types of bank accounts. You’re effectively loaning money to the issuer when you invest in any of these options. You get the money back when the bond, stock, or account reaches its maturity date and you’ll receive interest on the amount in the meantime.
What Is a Growth Investor?
A growth investor is someone who buys shares in companies that they expect will enjoy higher-than-average earnings and revenue as compared to other firms in the same sector or industry. These companies are often small, new companies with a good bit of growth potential.
The Bottom Line
Emerging market funds invest heavily in the common stocks of companies that are operating in growing and developing industries and are engaged with global markets. These companies are typically headquartered in countries such as China, Brazil, Russia, and India. They offer the potential to participate in developing economies but they’re typically not a good fit for investors who are risk-aversive.
Disclosure: This article is not intended to provide investment advice. Investing in securities entails varying degrees of risk and can result in partial or total loss of principal. The trading strategies discussed in this article are complex and should not be undertaken by novice investors. Readers seeking to engage in such trading strategies should seek extensive education on the topic.
