Many exchange traded funds (ETFs) give investors easy access to globalization. While there can be benefits to investing in emerging markets, there can be drawbacks as well. Walter Updegrave for CNN Money gives some of the pros and cons for this investment sector:
Wrong reasons to invest in emerging market ETFs:
- "Emerging markets have had amazing returns, so I should invest there." This school of thought is inaccurate because history shows that people generally jump in after the biggest gains already have been made.
- "The U.S. market is terrible, so I’m going to invest abroad." Investing in foreign shares as a safe money haven from a volatile U.S. market doesn’t work. Because the U.S. market is so large, when it drops, it takes other major countries’ markets down with it.
- Because emerging markets are easily influenced by their country’s individual economy, politics, etc., they can turn downward quickly and sharply.
- When the emerging market ETFs are below their long-term trend line, it is better to wait for an upward trend.
Right reasons to invest in emerging market ETFs:
- They provide diversification for your portfolio.
- Over the long-term, U.S. and foreign markets don’t parallel each other.
- When emerging markets are up, they’re UP. South Korea and Brazil are excellent examples of this, as they’ve been the top performing ETFs year-to-date.
- Your portfolio can tolerate investing in higher risk ETFs.
For full disclosure, some of Tom Lydon’s clients own EWZ.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.