Emerging markets are a crucial asset class for investors who seek total diversification and potentially higher long-term gains.
In itself, the term “emerging markets” involves dozens of different countries from around the world, each with their own individual economic prospects.
Because of this, painting all emerging markets with a wide brush isn’t practical. High net worth investors seek a more targeted approach that depends on their own specific goals.
For example, Malaysia is on the verge becoming a fully developed economy. They enjoy a GDP per capita above $12,000 which is four times higher compared to the Philippines.
Yet both of these places fall under the same vague “emerging market” umbrella despite a vastly different economic situation.
Likewise, an Indonesian oil company has far different long-term potential and risk than a retail business in China.
You can easily understand why emerging market stocks and real estate will, by nature, vary significantly based on the nature of the investment.
Still, because of their rapid growth and strong demographic trends, you’ll generally find great opportunity in emerging markets. Knowing where exactly to invest is crucial though.
Here are some pointers about the best ways to invest in emerging markets, based on our many decades of combined on-the-ground experience.
Don’t Buy Emerging Markets ETFs
Quite frankly, there are countless stock traders giving poor advice on the internet. Many of them have never done any type of business in the developing world.
Let’s help dispel some myths before getting into the ideal methods of emerging market investment
One widespread piece of advice is that you should buy an emerging market ETF or mutual fund as a solution.
These type of funds are easily-tradable and, admittedly, are the two easiest methods of owning assets in developing nations. But they’re also probably the worst ways to do so.
Perhaps most important reason to not invest in emerging markets ETFs is that they don’t actually buy assets in emerging economies.
Yes, you read that correctly. Lots of emerging market mutual funds and ETFs don’t even live up to their namesake and are blatantly misclassified. They consist largely of equities in developed markets.
One of the biggest emerging market ETFs in the world, iShares MSCI Emerging Markets (NYSEARCA:EEM), puts over 30% of its holdings in developed economies.
Two out of the three top countries they invest in are South Korea and Taiwan!
Places like Qatar and the UAE are somehow on their list as well. By using any reasonable standards, those are among the wealthiest nations on Earth and certainly aren’t emerging markets.
China also takes up more than 30% of the ETF’s holdings. There are now over $50 billion dollars in this fund even though half of EEM’s assets are held in either developed nations or China.
Besides the lack of actual investment in emerging market stocks, these ETFs also place unusually high allocation on tech. In fact, seven out of the EEM’s ten largest holdings are in the tech industry.
This simply isn’t consistent with a diversified portfolio or the real opportunities that exist in emerging markets.
Indeed, emerging market funds and ETFs remain convenient, especially if you’re a foreign trader. They remain the most common method of buying stocks in developing Asia.
However, you should consider a different path if you truly want to invest in emerging markets the right way.
Invest in Emerging Markets Directly
If you shouldn’t buy mutual funds and ETFs, that leaves you with direct investment in emerging markets.
Moving somewhere like Cambodia and starting a company is often the best (and hardest) way to invest in high-growth economies. Let’s be real though: that’s not practical for most people.
Buying up real estate in strategic locations may also lead to impressive gains over the long term, giving you both rental income and appreciation.
We’ll start off with the easiest way you can invest in emerging markets directly: owning individual stocks.
To be perfectly clear, that’s in contrast to purchasing a basket of stocks through a mass-market fund or ETF. There’s a very distinguishable difference.
You can purchase individual stocks in Asia, South America, and elsewhere without leaving your home because most brokers offer international trades.
Charles Schwab and Fidelity, two of the largest American brokerage firms, allow trading in over a dozen countries.
Furthermore, a few emerging market stocks list themselves in countries other than where they are based. Baidu, to give one example, is traded on both the NASDAQ and in Hong Kong.
With that said, we think making international trades using a local account is much better. Your existing broker might let you trade in other countries. But you should still put forth some effort and open local brokerage accounts in the places you’re investing in.
