Exposure to an Emerging Markets Index such as the MSCI EM Index could lead to significant returns for investors. As global economic power shifts, investors are increasingly looking to emerging markets for diversification and higher growth prospects. These markets offer exciting opportunities, but understanding the best strategies to gain exposure is crucial. Intelligent investors tend to approach portfolio diversification with these following questions:
- Is now good time to invest in Emerging Markets?
- Are emerging markets worth investing into?
- Should I be looking into Vanguard emerging market funds?
- Why should I add emerging markets to my portfolio?
In this article, we will delve into the various approaches investors can take to tap into emerging markets, with a particular focus on China, India, Brazil, regional market options, and benchmark indices such as the MSCI Emerging Markets Index and the FTSE Emerging Market Index.
Disclaimer: This is not financial advice and you are responsible for your own investing decisions. When investing capital is at risk. This article may contain affiliate links.
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Understanding the Dynamics of Emerging Markets:
Emerging markets encompass a group of countries experiencing rapid economic growth and industrialization. According to the International Monetary Fund (IMF), emerging markets contribute significantly to global GDP growth. Factors such as rapid urbanization, a burgeoning middle class, technological advancements, and favourable demographics play a vital role in driving their growth.
However, it’s essential to be aware of the risks associated with investing in emerging markets. Political instability, currency fluctuations, regulatory uncertainties, and liquidity concerns are potential challenges that investors should carefully consider. Emerging markets are economically very different from one another. Knowing if you should include or exclude specific countries from your investments remains a difficult question to answer.
You may be wondering what to look for in your research? Whilst increasing portfolio diversification you will want to balance the premiums or higher fees and risk. The depth of research you want to conduct may result in you having to limit what EMs you invest in. Alternatively, diversifying in an Emerging Markets Index tracking fund may reduce the amount of research you need to do. Especially when this comes down to complex factors such as politics and macro economics.
Read: Emerging Markets Diversification: Is The FTSE Global All Cap Enough?
Why Invest In Emerging Markets?
Emerging markets present enticing opportunities for investors seeking diversification and higher growth prospects. By focusing on ETFs that concentrate on specific markets like China, India, and Brazil or exploring regional emerging markets funds, investors can tap into these markets’ potential.
Research has shown that investors can potentially improve their international portfolio allocation by tilting towards countries with favourable ‘skewness’. Skewness measures the asymmetry of a distribution, indicating the probability of large positive or negative returns. Many emerging market countries have high positive skew value. In short, this means that Emerging markets whilst volatile, also have a higher probability of a positive upswing. In fact Emerging Markets are projected by the IMF to grow at twice the rate of Developed markets. Check out the IMF data mapper.
Investing in ETFs Focused on China, India, and Brazil:
Exchange-Traded Funds (ETFs) are a popular and accessible way to gain exposure to specific emerging markets. By investing in ETFs that concentrate on countries like China, India, and Brazil, investors can target opportunities unique to each market. Investors in the UK have access to funds such as iShares China Large Cap UCITS ETF, iShares MSCI India UCITS ETF, iShares MSCI Brazil UCITS ETF.
The HSBC MSCI China UCITS ETF is also available for a more expansive approach to investing in China. As this exposes investors to 766 Chinese stocks compared to just 50 Large Cap stocks. In fact, HSBC ETFs do seem to be some of the best value for individual Emerging Market country specific funds. Fidelity investors also have access to a number of HSBC funds such as HSBC MSCI KOREA CAPPED ETF, HSBC MSCI Brazil ETF. Fidelity-HSBC even offers access to markets such asHSBC MSCI Indonesia ETF.
Investors can also consider regional emerging markets funds to capture broader growth opportunities. Funds like iShares MSCI Emerging Markets ETF (EEM) and Vanguard FTSE Emerging Markets UCITS ETF (VFEM). provide exposure to a basket of emerging markets beyond China, India, and Brazil.
For those seeking specific regional exposure, funds like iShares MSCI Emerging Markets Asia ETF (EEMA) or iShares MSCI Emerging Markets Eastern Europe ETF (ESR) target emerging markets in Asia or Eastern Europe, respectively.
Emerging Markets Index: MSCI vs FTSE Tracking
Understanding benchmark indices such as the MSCI Emerging Markets Index and the FTSE Emerging Market Index can further guide investment decisions. Benchmark indices play a crucial role in tracking the performance of emerging markets. Two prominent indices in this space are the MSCI Emerging Markets Index and the FTSE Emerging Market Index. Understanding their differences can help investors make informed decisions.
The MSCI Emerging Markets Index is widely recognized and tracks the performance of large and mid-cap companies across 26 emerging market countries. This index covers approximately 1,400 constituents and is weighted by market capitalization. It serves as a benchmark for many emerging market funds and ETFs.
On the other hand, the FTSE Emerging Market Index includes a broader range of countries, covering over 20 emerging market economies. It emphasizes accessibility and invest-ability by focusing on larger and more liquid companies. This index is also widely used as a benchmark for emerging market investments. There is one fundamental difference between the MSCI Emerging Markets Index and the FTSE Emerging Markets Index. This is that is that South Korea is classified as an emerging nation by MSCI but has been promoted to developed market status by FTSE.
Read: Why Exchange Traded Funds In Emerging Markets Offer Outstanding Returns
FTSE Emerging Markets Index vs MSCI Emerging Markets Index
You can compare the performance of these Indices using the Fidelity Index Emerging Markets P Acc which tracks the MSCI Emerging Markets (Net Total Return) Index. Then the iShares Emerging Markets Equity Index Fund (UK) H Acc tracks the FTSE Emerging Index.
You can see that the iShares Emerging Market fund (FTSE Emerging Markets Index) tracks ahead of the Fidelity Emerging Markets P Acc fund (MSCI) by 10% Therefore this difference in composition would lead to a difference of around £1000 per every £10,000 invested.
Fidelity Index Emerging Markets p acc Performance
This means that if you’d have invested £100,000 in the MSCI Emerging Markets Index vs the FTSE Emerging Markets Index, you’d have gained an extra £10,000 over 10 years. It’s worth noting that both the Fidelity Emerging Markets and the iShares Emerging Markets funds would have generated returns of over 60% in 10 years. That means if you invested £10,000 it would now be worth over £16,000.
It’s worth noting that those returns were accumulated during one of the longest bear markets. The MSCI Emerging Markets Index spent a record 594 days trending below its peak valuation. Although by February 2023 the MSCI Emerging Markets index surged more than 20% from its October low. Indicating that it could be entering a bull market run, a prediction echoed by Morgan Stanley.
The fidelity index emerging markets p acc has decent historical returns. Whilst this is no guarantee of future results, the commentary from the experts suggests that EM funds may perform strongly in the future. This means that the likes of the fidelity index emerging markets p acc will also generate positive future returns for investors.
Conclusion: Investing In Emerging Markets Index Funds
Emerging markets present enticing opportunities for investors seeking diversification and higher growth prospects. By focusing on ETFs that concentrate on specific markets like China, India, and Brazil or exploring regional emerging markets funds, investors can tap into these markets’ potential.
Understanding benchmark indices such as the MSCI Emerging Markets Index and the FTSE Emerging Market Index can further guide investment decisions. Remember to manage risks through diversification, currency risk management, and regular portfolio reviews. With careful research and consultation you can navigate the emerging markets landscape. Which means you can make informed investment decisions aligned with your goals.
For example, targeting Asian, European or South American Emerging Markets can make a significant difference. Even at regional level you may want to include or exclude markets such as China or South Korea. Each country and region exposes you to different industries, from electrical goods such as semi-conductors to iron ore production. South Korea is a much more significant exporter of technology, where as Brazil is more focused on the later.
How To Broadly Invest In Emerging Markets Index Funds
Investing in Emerging Markets can seem more challenging that investing in global ETFs. For example, you probably already have a Global ETF with Vanguard, Fidelity or Hargreaves Lansdown. If you don’t then get the 8 index funds that make my personal shortlist. This list includes global funds which capture the likes of Fidelity’s Emerging markets index fund.
Diversifying or enriching your portfolio with these large institutions can feel tedious. There are usually a number of clunky and often overwhelming steps. Want a fast way to invest in Emerging markets? Then I’ve got just the investing app for use and it’s one that I personally use.
The Lightyear Investment app is a quick and easy way to diversify your portfolio. That’s because it takes minutes to get set-up and even less to invest in an Emerging Markets ETF. With Lightyear, you have instance access to over 10 Emerging Markets funds and even more stocks. For example, you can invest in the iShares MSCI EM Asia Fund or even a Vanguard FTSE Emerging Markets Fund.
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