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Investing In Emerging and Frontier Markets


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Why Investing In Emerging Markets Using Funds Makes Sense

Investing In Emerging And Frontier MarketsFor investors looking to put money into more speculative, but potentially more rewarding investments, investing in emerging and frontier markets is worthy of consideration.  The world of investment is essentially divided into three broad categories:  developed markets, such as the United States and the developed world, emerging markets, such as China and the developing world, and frontier markets, such as Botswana and countries that are making the transition to the developing world.

Emerging and frontier markets are located on the continents of Asia, Africa, and South America.  Out of these three continents, Africa is often overlooked by investors looking for investments in frontier markets.  Africa has some of the fastest growing economies in the world, as countries emerge from their undeveloped state and make use of their plentiful natural resources to develop their economies.  One thing that emerging and frontier markets tend to have in common is a citizenry that is struggling to improve their standard of living, which is a natural driver of economic growth.  These countries also tend to have natural resources that are in the process of being developed, which provides a boost to gross national product and eventually per capita income.

Frontier MarketsWhile investing in developed markets is the safest bet amongst the three broad investment categories, it also provides a lower economic growth rate and potentially less robust returns than high growth emerging and frontier markets.  The difference between emerging and frontier markets is sometimes a bit unclear, as frontier markets are moving in the direction of becoming emerging markets.  Emerging markets are defined as countries that are rapidly industrializing and have a relatively short but established tradition of development.  Frontier markets are defined as countries that are in the process of transforming from non-industrialized economies to rapidly industrializing economies.  While emerging markets are a bit safer to invest in, since they are already rapidly industrializing and often experience growth levels well above those experienced in developed markets, frontier markets have the potential for explosive growth, which makes the profit potential even higher than emerging markets.

Researching and investing in companies located in emerging and frontier markets is very difficult.  Obtaining information can be difficult, due to varying reporting standards within their respective countries.  Also, the stocks of companies located in emerging and frontier markets are often traded locally, and are not easily accessible to investors located in developed countries.  The easiest way to invest in emerging and frontier markets is to buy mutual funds, exchange traded funds (ETFs), or exchange traded notes (ETNs) that invest in securities of companies either located in emerging and frontier markets or that obtain a significant portion of their revenue and income from operations in emerging and frontier markets.  Although there are fees associated with investing in emerging and frontier markets via funds, these fees are well worth the cost, since the research of suitable companies and purchase of securities is handled by the investment professionals that manage the funds.

Investing In Emerging Markets Using Funds

Emerging Markets
There are a number of funds that can be used to invest in emerging and frontier markets.  The following are some examples of funds that can be used to invest in emerging and frontier markets.  Due to the speculative nature of investments in emerging and frontier markets, only a portion of an investment portfolio should be allocated to emerging and frontier markets investments, such as the following investment fund ideas.

  • BLDRS Emerging Markets 50 ADR Index Fund (NASDAQ: ADRE) – ADRE is an emerging markets fund that invests in emerging markets companies that are included in the Bank of New York Emerging Markets 50 ADR Index.
  • SPDR S&P Emerging Latin America ETF (NYSE: GML) – GML is an emerging markets fund that tracks the performance of the S&P Latin America BMI Index, which includes companies based in or doing business Latin American emerging markets.
  • SPDR S&P Emerging Markets Small Cap (NYSE: EWX) – EWX is an emerging markets fund that invests in the small capitalization companies that do business in emerging market countries. The fund is designed to generally track the performance of the S&P Emerging Markets Under $2 Billion Index.
  • Wasatch Frontier Emerg Sm Countrs Inv (WAFMX) – WAFMX is a mutual fund that invests in equities of companies that do business in small emerging and frontier markets.
  • HSBC Frontier Markets A (HSFAX) – HSFAX is a mutual fund that invests in equities of companies doing business in frontier markets.  It generally invests in frontier market companies with market capitalizations of $100 million or more, but can invest in companies of any size.
  • iShares MSCI Frontier 100 Index (NYSE:  FM) –  FM is a frontier markets fund that tracks the performance of the MSCI Frontier Markets 100 Index.
  • Market Vectors Africa Index ETF (NYSE:  AFK) – Market Vectors Africa Index ETF focuses its investment in economies of countries located in Africa, which boasts some of the fastest growing economies in the world.  The fund is considered to be mainly a frontier markets fund, since many of the African countries that it invests in have frontier markets.

It is important to keep in mind that emerging and frontier markets are notoriously volatile, and therefore the funds that track them are also volatile.  However, in the long term, emerging and frontier markets have great growth potential, which could translate to above-average growth rates for companies doing business in these fast growing markets and to above-average returns for funds invested in these companies.

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