Since the advent of exchange traded funds (ETFs), investing globally has never been easier. ETFs are an effective way to gain exposure to foreign investments without the hassle of accessing foreign stocks through specialized brokerage accounts or spending countless hours researching individual overseas companies.
Though the diversified structure of ETFs mitigates your risk, there are not only risks existing in emerging market and frontier market ETFs, but there are varying levels of this risk.
That doesn’t mean you should be scared off by these funds. With most of the world’s market cap residing outside of the United States, emerging and frontier markets deserve a home of some sort in most portfolios. It’s all just a matter of selecting what’s right for you.
The Benefits of Investing Globally
Whether through a country-specific ETF or a broad/regional international ETF, investing in emerging and frontier markets provides diversification to an otherwise bland portfolio. How much international exposure should you have in your portfolio? Some experts suggest that around 25% is a good guideline, but this is up to each individual.
Internationally themed ETFs trade on a U.S. exchange and aim to reflect an underlying index that correlates to a particular country or region. This may result in higher volatility since other countries’ exchanges will be trading in different time zones.
What do you and your clients stand to gain by investing globally? Several things:
- Gains by U.S. investors in overseas markets have enjoyed a “dollar kicker” when assets are repatriated to U.S. dollars.
- Country-focused ETFs are a good way to aim a portfolio at weighting countries more on growth potential rather than market capitalization; this way, any growth potential is harnessed and none of those gains are left out.
- Single country funds also make plays upon other areas; for example, Australia can give good exposure to commodities, and is in the position to spot most of China’s growth; Singapore’s ETF also has high exposure to industrials and telecommunications.
- By using the single-country ETFs, it is possible to challenge the larger conventional indexes, and still garner the diversification and gains.
Emerging Markets
The definition of “emerging market” varies depending on who you ask, but generally speaking, these economies have a low- to middle-per capita income per person. They might sound like small fry, but these countries account for 80% of the world’s population. They’re considered emerging because of where they are with infrastructure, reforms and the practices of their governments. These economies are in transition, progressing from closed to open market economies.
With developed economies expanding at a crawl, more emerging markets are turning inward for growth instead of relying so heavily on exports. A growing middle class in most of these countries has fueled domestic demand. High levels of government spending on infrastructure projects has helped to maintain the needs of the growing middle class.
There are a number of these markets represented by ETFs: Brazil, Russia, India and China (collectively know as the BRICs). There is Indonesia, Malaysia, Thailand and Singapore. Or there’s Poland, South Africa and the Czech Republic.