October 27, 2022

Finding The Best Emerging Market Index Funds


When building a portfolio, we always recommend incorporating a diverse mix of investment strategies. Buying shares in the best emerging market index funds can be one strategy to consider, but how can you determine if this is the right fit for you? Lets take a look at these index funds. 


Emerging Markets: Understanding This Classification

In countries or regions where stock markets exist, investment firms such as Morgan Stanley International (MSCI) or economic organizations such as the International Monetary Fund (IMF), will classify these markets as developed, emerging or frontier markets.


The criteria used by these groups for classification purposes typically include the growth rate of the economy, the political stability of the country, the strength and stability of financial systems in the country and other factors.


Developed countries, such as the United States, Japan and the United Kingdom have long-standing markets with general economic stability and stable governments. Emerging markets are located in countries with developing economies that are poised for growth and, hopefully, moving toward developed market status.


Country classifications can change if the stability of the economy or government changes. For instance, Greece was once considered a developed market, but because of economic turmoil, most market classifiers have this nation now listed as an emerging market.


Russia was for many years listed as an emerging market, but with the recent invasion of Ukraine, Russia has lost its emerging market status. Some market classifiers simply removed Russia entirely from any market classification list and others now classify Russia as a standalone market.


Of course, sometimes a market will improve enough to progress from a frontier market to an emerging market. For instance, Israel moved from emerging market status to developed status in 2010. Greece moved from emerging to developed in 2001, but, as stated above, has moved back into emerging status due to instability.


Why does market status matter? In general, investments in developed markets tend to be less risky than those in emerging or frontier markets. All investment options carry risk, so there is never a guarantee that your investment will yield positive results, even within a developed market.


On the flip side, while the risk with emerging markets or frontier markets might be higher, the rewards potentially could be higher. These two markets tend to have high levels of growth and younger, consumer-driven populations, which means there is plenty of opportunity in these developing economies. 


What Is An Emerging Market Index Fund?

One reason why markets are classified as either emerging or frontier is that it can be difficult for investors to invest in these markets. While buying shares of a U.S.-based company can be handled with relative ease, this isnt always the case with emerging markets in Africa, South America and Asia.


Purchasing shares of an emerging market-based mutual fund or exchange-traded fund (ETF), can be two of the easiest ways to gain exposure to emerging markets. The funds are diversified with multiple holdings, which can reduce risk. Mutual funds and ETFs also can be purchased either through your portfolio manager or even an online brokerage firm quickly and easily.


Funds are created by fund managers and the holdings can include a mix of investments that the managers believe will be profitable or the fund can be an index fund. This means that the investments in the fund were chosen to track a specific financial market index.


For instance, there are S&P 500 index funds that track the Standard & Poor 500, which includes 500 of the largest companies in the United States. These companies include Apple, Amazon, Google, Chevron, Pfizer, Coca-Cola and many others. This can be a good option for investors seeking long-term growth.


Index funds have some advantages over other types of funds. For one thing, because the fund is built to track an index, it is passively managed, which typically results in lower fees and expenses. Actively managed funds have higher fees simply because the management teams have to do more work than simply tracking an index.


What Are The Best Emerging Market Index Funds?

When it comes to selecting the best funds, this truly can be very subjective and entirely based on the needs and inclinations of the individual investor. Some investors might prefer investing in certain economic sectors, such as consumer discretionary or perhaps energy or information technology.


If you want passively managed emerging markets mutual funds, you could find a fund or ETF that tracts the MSCI Emerging Markets Index or perhaps an FTSE emerging market index, such as the FTSE Emerging Markets All Cap China A Inclusion Index. 


Other investors might have a specific region or country in mind when they consider investing in emerging markets. For instance, an Africa investor might consider a South Africa ETF or opt for an Africa ETF that tracks the MVIS GDP Africa Index (MVAFKTR).


Other options include focusing on emerging markets in Asia, such as selecting a South Korea fund or perhaps a mutual fund or ETF that focuses on India or China or Latin America. These may or may not be "index" funds, as some of these investment options may be actively managed and not tracking an index.


These days, there are quite a few diversified emerging market ETFs to consider, and even a few frontier market ETFs. ETFs offer an easy way to invest in emerging market stocks and you can buy and sell shares throughout the trading day. With a mutual fund, you can only buy or sell at the end of the trading day once the fund's net asset value has been calculated.


We recommend studying each investment opportunity carefully. Begin by studying the company that is selling the mutual fund or ETF. Do some research about the fund managers and take a look at the value of assets under management and the expense ratio.


Research the companies in the mutual fund or ETF, as well as the sectors represented in the fund to determine if they align with your goals and values. For some emerging market investors, the goal is not just about profits but also looking for socially responsible investment options. Investing in these emerging countries can be a way to help boost the economies in this region, and that can be an attractive feature for some investors.


In the final analysis, determining which are the best emerging market index funds or best emerging market funds in general truly depends on the goals of the individual investor. Taking the time to research each investment opportunity is crucial, and we also recommend keeping a close eye on the performance of your investments to ensure that your portfolio remains as strong as possible to meet your long-term goals.




August 31, 2022

What To Look For In A Frontier Markets ETF

Investors have hundreds of investment options, and exchange-traded funds (ETFs) provide an easy way to invest in many sectors and regions. A frontier markets ETF is an option that can provide excellent yields, but before you invest, its smart to do some research about frontier markets and the type of ETF thats best for your portfolio.

What Are Frontier Markets?

Stock markets are classified as Developed, Emerging, Frontier or Standalone depending on many factors. In a developed market, you tend to have stable economies, stable governments and stable currencies with high liquidity and easy access to the markets.


Developed markets include countries such as the United States, Canada, Japan, the United Kingdom and Hong Kong. Emerging markets include countries such as China, India, Egypt, Mexico, Brazil and South Africa. Frontier markets include countries such as Romania, Iceland, Estonia, Morocco, Nigeria, Kenya, Jordan, Vietnam and Pakistan among others.


Why Invest In Frontier Markets?

In general, frontier market investments are considered riskier than investments in emerging markets or developed markets. The economies and governments in these countries tend to be less stable, and these markets often have poor liquidity and unstable currencies.


With emerging markets and frontier markets, the governments are established but tend to be a bit less developed and stable with less liquidity and more currency instability. In theory, this makes investing in these markets riskier than investments in developed markets.


Despite these risks, there are some opportunities to be had investing in frontier markets. There may be enormous potential for growth and the yields potentially could be higher than many investments in developed or emerging markets, although there is never any guarantee of success with this or any other investment.


While the risk may be greater, the rewards could be higher as industries in these regions and countries are expanding rapidly to provide goods and services for growing populations. Populations in emerging and frontier markets tend to be younger and less focused on annuities, which means that they have greater demands for goods and services in general which helps fuel the market and can provide great opportunities for an investor.


Of course, as with any investment, there are never any guarantees that an ETF or any type of investment will yield positive results. This is why thorough research is an important step to take before allocating money to any type of investment.


Why Consider A Frontier Markets ETF?

With limited access to frontier markets, purchasing shares in an ETF can be the easiest way to gain exposure to frontier markets as well as emerging markets. Additionally, ETFs are diversified, which can minimize risk as the fund contains holdings from many companies.


There are a few general frontier markets ETFs out there that you can select, or you could select an ETF that invests in companies in specific countries classified as frontier markets. For instance, you could opt for a Vietnam ETF or perhaps a regional ETF such as an Africa ETF, where the holdings are based in countries throughout the African continent.


Another investment strategy that can help you gain geographic exposure in a specific frontier market might include looking into purchasing real estate in that country. Other asset classes might include buying stock in a specific company (as opposed to a fund with many holdings) or investing in commodities or currency. In general, these can be more difficult than purchasing an ETF, but it can be smart to weigh all of your options when investing to ensure long-term success.


Selecting The Best Frontier Markets ETF For You

With any ETF, there are a few basics that investors should think about to determine whether or not this is the best choice for their portfolio. Before buying shares, an investor should track the performance data of the ETF in general, especially how it relates to whatever index it is tracking.


ETFs are built to track a specific index as closely as possible. For instance, an Africa ETF might track the MVIS® GDP Africa Index. In theory, the ETF should track along with the index. So, if the index is up by 6%, in theory, your ETF also should be up by about that much. 


Typically, the increase will be less than the index increases because the issuer does incur a cost to manage the fund, and some of the returns pay for those expenses. If there is a large discrepancy between the index the ETF tracks, this can be a red flag.


Its also wise to look at the holdings in the ETF and make note of how the holdings are weighted. Research the companies whose shares comprise the highest percentage of net assets as these tend to make the most impact on the performance of the fund. Keep in mind, that these holdings and the percentage of net assets can change over time as the fund managers may decide to alter the fund.


Be sure to look at the country weightings and sector weightings. For instance, you might want to ensure that the country weightings are truly in frontier markets rather than a larger developed country. Many people opt for frontier market investing not only as a potential source of income but also as a type of socially responsible investing (SRI) strategy.


If the frontier ETF is mostly weighted toward companies owned by foreign investors, this might go against your SRI goals. Likewise, with sector weightings, you might wish to invest in specific industries and exclude others, so take a look at the sectors represented in the ETF.


In general, ETFs can provide an easy option for investors provided they research each fund carefully and keep an eye on the progress (or lack of progress) of the ETF. A trusted financial advisor can be a good resource to help you select the best ETFs for you whether they are focused on developed markets, frontier markets or emerging markets, such as a South Africa ETF.


We also recommend that you research the company offering the ETF and check out the history of the company and the market value of that firms assets under management. Additionally, make note of the historical management performance and you can even do some research about the fund managers.  


Keep Up With Frontier Markets

At Money Watch Africa, our goal is to provide helpful information and emerging market news for the Africa investor, including emerging market ETFs and frontier markets ETFs. Be sure to check our website regularly to keep up on the latest developments on how to invest in Africa