3 Ways to Invest in the Emerging Market

Apr 13, 2021 06:25 PM ET
3 Ways to Invest in the Emerging Market

Emerging markets (EM) refer to countries that are on track to become the next developed countries. They are countries between developed countries like the United States and developing countries like Kenya. In the past few years, some EM countries, like China, have become some of the fastest-growing economies. 

In this article, we will look at some of the top ways of investing in emerging markets. Some of the EM countries we will consider are China, Brazil, Russia, South Africa, Indonesia, and Singapore. 

Emerging market stocks

Stocks refer to shares of publicly traded companies. In the United States, some of the most popular stocks are Apple, Microsoft, and Tesla. 

Stocks are among the best assets to own when you are investing in an emerging market. For one, in the past few years, some of the best-known global companies are from the EM. For example, in China, companies like Tencent, Alibaba, and Baidu have become among the biggest firms in the world. 

Similarly, Brazilian companies like StoneCo and South Africa’s Naspers are leading players in their industries. Therefore, as an investor, you can take advantage of the growing emerging markets and invest in some of their leading companies. 

In addition to those mentioned, other EM companies popular among investors are firms like Meituan, JD.com, Nio, IQiyi, MercadoLibre, and Gazprom, among others.

As an American investor, there are three main ways of investing in emerging market companies like Alibaba and Baidu. For one, unless you are a big investor, it is almost impossible to invest in companies listed in foreign exchanges. 

First, you can invest in EM companies that are listed in the United States. Some of these firms are Alibaba and Baidu. They are listed in the leading American exchanges like the New York Stock Exchange (NYSE) and the Nasdaq and can be traded through popular brokers like Robinhood and Schwab.

Second, you can invest in EM stocks through American Depository Receipts (ADRs). These are products created by banks and brokerages to offer American investors access to foreign firms. They are listed in the popular exchanges and over-the-counter (OTC) platforms.

Third, you can invest in EM stocks through exchange-traded funds (ETFs). These are funds made up of tens or even hundreds of companies from the EM. Some of the most popular EM ETFs are the Vanguard FTSE Emerging Market ETF (VWO), iShares Core Emerging Markets ETF (IEMG), and Schwab Emerging Markets Equity ETF (SCHE).

Emerging market bonds

A bond is a loan that companies, countries, and other entities take from investors, central banks, and other governments to fund large projects. It is often the easiest and cheapest method of fundraising. 

Emerging markets and large companies are among the biggest players in the bond market. According to Aberdeen Standard, the total amount of Emerging Markets was more than $2 trillion in 2019. This figure has risen sharply since 2020 because of the borrowing binge amid the coronavirus pandemic. 

As an investor, you can buy bonds in an emerging market country that you believe in. These bonds are offered by many online brokers like E*Trade, Schwab, and Fidelity. 

Like stocks, you can also take advantage of the ETF market to invest in emerging market bonds. These ETFs are created when the fund managers buy a substantial number of bonds and offer them as a single product that is listed in one of the leading exchanges. You can then buy the bonds through an online broker.

Some of the most popular EM bond funds are Voya Emerging Markets Corporate Debt Fund, iShares JPMorgan USD Emerging Markets Bond ETF, and Invesco Emerging Markets Sovereign Debt.

There are a few things you need to know when investing in EM bonds. First, there are two broad types of EM bonds: corporate and sovereign. A corporate bond is one issued by a company, while a sovereign fund is issued by a country. Second, you need to know what moves bond prices in the long term. These include things like interest rates, economic stability, and bond ratings, etc.

Emerging market currencies

Another popular method of investing in emerging markets is through their currencies. Ideally, you can buy a country’s currency if you believe that its value will rise in the longer term. For example, if you believe that an EM currency like the South African rand will do better than the dollar, you can buy it instead. 

For example, in 2020, the South African rand rose by more than 10% against the US dollar. Therefore, if you had bought the currency, you would have made a substantial return in a year. 

Investing in EM currencies is the easiest method to use. For one, you can easily convert your cash into that of a currency that you want. This conversion costs almost no money, and you can do it online through your bank’s app. 

Another way of investing in EM currencies is through ETFs. The popular EM currencies ETFs are WisdomTree Dreyfus Emerging Currency, WisdomTree South African Rand, and WisdomTree Brazil Real Currency.

However, EM currencies are often relatively risky. For example, in March 2020, the Turkish lira collapsed by more than 15% when the Turkish president fired the then Central Bank governor. Similarly, in 2018, the Argentine peso crashed after the country defaulted on its obligations. In 2019, the currency fell by 30% in a single day after President Macri lost his re-election.

Final thoughts

Emerging Markets have been in the radar for a while. Indeed, all of the biggest US investors like Carlyle, Blackrock, and Vanguard have created offices and analysts in the leading EM countries like Brazil and China. 

In this article, we have looked at some of the easiest ways you can take advantage of the ongoing shift to the EM. It will help you diversify your portfolio and make uncorrelated returns. It will also help you to invest in the fastest-growing economies.


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