For the last ten years to the end of 2019, emerging markets (EM) have experienced remarkable growth. Between 2010 and 2019, the MSCI EM Index expanded by about $3 trillion in terms of market capitalization. The MSCI EM Index is a crucial indicator of the economic growth among 24 countries developing countries in the emerging markets category.
If you look at the economic growth of the developing countries in terms of percentage in the past decade, you will a clearer idea of what it means for people who invested in these economies in early 2010s. In 2019 alone, the MSCI EM Index grew by 15.4%, and so did the FTSE emerging index (an alternative gauge of economic growth among developing countries) grow by 17% in the same period. From the foregoing, there is a lot of income potential in investing in emerging markets going forward. However, where do you begin?
Go for direct exposure
A good investor knows that higher risk always implies higher gains. Compared to developed economies, emerging markets face many challenges hence making it riskier to put your money there. However, these economies are still growing because they are far away from their full potential. As such, the probability of scoring double-digit gains with direct investment is real. You can invest directly by buying stock from local exchanges like the Shanghai Stock Exchange, for example.
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We are not always willing to go all in when putting money in the equities or bond markets. This is understandable, especially when speaking of developing economies. Some countries pose huge risks due economic mismanagement borne out of lack of strong institutions. As such, an investor might want exposure to the emerging markets but still maintaining a safe distance from the full impact of the risks involved. In this case, you could buy the stock of emerging market companies listed on exchanges in the developed countries. For example, buying the stock of an emerging market company listed on the NYSE is less risky for one major reason, which is that the company is run as per standards set by the NYSE, which reduces risk of mismanagement.
Emerging market-focused ETFs
Better still, there is the option of invest in exchange-traded funds that focus on the developing economies. For example, the iShares MSCI Emerging Markets ETF focuses on developing economies’ stocks (both mid-cap and large cap). Hypothetically, if one invested $10,000 in the ETF since its birth, one would be looking at just over $50,000 ten years later.