Emerging market equities and region-related ETFs have garnered increased attention from advisors and investors as more look to international opportunities in an extended bull market environment.
“While emerging markets do present a different set of investment risks compared with developed markets, they also offer growth potential that established markets simply can’t match,” Edward Kerschner, Chief Portfolio Strategist at Columbia Threadneedle Investments, said in a note.
Kerschner pointed to three major factors that may continue to contribute to strength in the emerging markets, including their contribution to the global economy, the untapped growth potential of developing economies and a rising middle-income class.
Emerging markets account for 40% of the global economy, doubling in the past 25 years. The emerging markets as a whole are now the largest economy in the world, overshadowing the U.S., Japan and all of Europe. Looking ahead, emerging market economies are expected to expand at a faster clip than developed markets every year through 2021, according to the International Monetary Fund.
The rapidly expanding emerging markets are expected to be supported by population growth and productivity growth. There is a rapid population growth when compared to developed markets. Meanwhile, producing more output per worker in a developing economy is much simpler relative to developed economies where ongoing investment in the latest technologies are required.
Additionally, emerging market consumers will play an increasingly larger role ahead. Only about 4% of the world’s population was middle class living in emerging countries back in 2000, but it is expected to rise to 15% by 2030, according to the OECD Development Center. As the middle-income class grows, this could translate to increased discretionary spending, which could fuel growth in the emerging consumer sectors.
ETF Investors may gain broad exposure to the emerging markets thorugh options like the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG), EGShares EM Core ex-China ETF (NYSEArca:XCEM) and Columbia EM Quality Dividend ETF (NYSEArca: HILO).
Something like the Columbia Emerging Markets Consumer ETF (NYSEArca: ECON) can also help investors focus on the many high-quality consumer brands that cater toward a rising middle class.
For more information on the developing economies, visit our emerging markets category.