Investments in emerging market economies generally carry a higher degree of risk than assets in the U.S. The risks inherent to many diversified emerging market mutual funds include emerging markets risk, stock market risk, country risk, regional risk, currency risk, political risk and, in some cases, active management risk and indexing risk. To compensate for the high degree of risk and volatility, emerging market mutual funds tend to offer higher potential returns.
Diversified emerging market mutual funds provide investors with professionally managed exposure to companies doing business in rapidly developing foreign markets. They invest primarily in the common stocks of companies headquartered in countries such as China, Brazil, Russia and India. The funds may also invest in bonds issued by governments, government agencies and corporations based in those countries.
It should be noted that even the definition of "emerging market" varies with world events. A few years ago, Egypt and Turkey both were on the radar of many emerging market investors. More recent events have, at least for now, driven those nations off many lists. That may speak to the need for professionally managed exposure to emerging markets, and also to the risk tolerance required by investors in them.
That said, the following funds spread their investments broadly enough that they can't get utterly devastated by tomorrow's news. They don't just invest directly in the companies of emerging markets. They also invest in companies that do business in emerging markets.
American Funds New World Fund Class A
The American Funds New World Fund Class A (NASDAQ: NEWFX) seeks to provide long-term capital appreciation by primarily investing in common stocks of companies domiciled in emerging market economies. NEWFX was issued on June 17, 1999, by American Funds Distributors, Inc. As of Nov. 7, 2018, NEWFX had about $36 billion in total net assets and was advised by Capital Research and Management Company. NEWFX charges an expense ratio of 1.04%.
Under normal circumstances, NEWFX invests at least 35% of its total net assets in equity and debt securities of issuers primarily based in countries the fund's adviser deems to be emerging market economies. NEWFX may invest in common stock of any company, regardless of its location, as long as at least 20% of its revenues are attributable to emerging countries. The fund may allocate a maximum of 25% of its portfolio to nonconvertible debt securities of issuers domiciled in qualified emerging countries. As of June 30, 2015, NEWFX allocates 15% of its portfolio to the United States; 26% to Europe; 36.6% to Asia and the Pacific Basin; 7.7% to cash and cash equivalents; and 14.7% to other regions, including Canada and Latin America.
In terms of modern portfolio theory, NEWFX is best suited for highly risk-tolerant investors with a long-term investment horizon seeking exposure to stocks and bonds in emerging market economies.
Vanguard Emerging Markets Stock Index Fund
The Vanguard Emerging Markets Stock Index Fund (NASDAQ: VEIEX) was issued on May 4, 1994, by Vanguard. To invest in shares of VEIEX, a minimum investment of $3,000 is required. Like most Vanguard funds, VEIEX charges a low expense ratio, relative to the average expense ratio of diversified emerging market funds, of 0.32%. The fund is managed by the Vanguard Equity Investment Group and seeks to provide investment results corresponding to the performance of the FTSE Emerging Index, its benchmark index.
To achieve its investment objective, VEIEX implements an indexing strategy. Under normal market conditions, the fund invests approximately 95% of its total net assets in common stocks of companies comprising the FTSE Emerging Index. VEIEX had total net assets of almost $80 billion as of Nov. 7, 2018. The fund is heavily weighted toward China, Taiwan and India, and allocates 27.10%, 13.9% and 12.7% of its portfolio to these countries, respectively. In late 2018, its biggest holdings were in Tencent Holdings, Taiwan Semiconductor and Alibaba.
The fund is a high-risk, high-reward investment that is best suited for long-term investors with high degrees of risk tolerance seeking to gain exposure to common stocks of companies domiciled in developing countries. Additionally, VEIEX is suitable for investors who seek to diversify their portfolios.
T. Rowe Price Emerging Markets Stock Fund
Issued on March 31, 1995, the T. Rowe Price Emerging Markets Stock Fund (NASDAQ: PRMSX) seeks to provide investors with long-term capital appreciation by investing in undervalued common stocks of companies domiciled in developing countries. PRMSX is advised by T. Rowe Price Associates, Inc. and sub-advised by T. Rowe Price International Ltd. The fund charges an annual expense ratio of 1.23%.
Under normal market conditions, PRMSX invests at least 80% of its total net assets in common stocks of emerging market companies. The fund implements a growth strategy and selects companies based on their capabilities of sustaining long-term earnings growth, cash flows and book values. As of the end of October 2018, PRMSX has total net assets of nearly $10 billion.
PRMSX is heavily weighted toward China, India and Taiwan, and allocates 43.2% of its portfolio to these countries. Although the fund offers diversified exposure to many sectors, it is heavily weighted toward common stocks of companies in the financial and information technology sectors, which make up over 50% of its portfolio.
PRMSX is best suited for long-term, highly risk-tolerant, growth investors seeking to gain exposure to undervalued common stocks of companies in emerging countries. Investors may consider PRMSX if they want to add diversification to their portfolios, while potentially generating high returns over the long run.
Oppenheimer Developing Markets Fund Class A
The Oppenheimer Developing Markets Fund Class A was issued on Nov. 18, 1996, by Oppenheimer Funds. The fund is advised by OFI Global Asset Management, Inc. and sub-advised by Oppenheimer Funds, Inc. Investors must put a minimum of $1,000 into this portfolio and are charged an annual net expense ratio of 1.32%. In late 2018, the fund had more than $5 billion in portfolio assets.
The fund mainly invests in common stocks of companies in developing and emerging market economies. It normally invests at least 80% of its total net assets in equity securities of companies with business activities in developing markets. Its manager seeks to achieve its investment objective by investing in common stocks of emerging companies expected to grow at a faster rate than the world gross domestic product (GDP).
The fund compensated for its high degree of volatility with an average annualized return of 10.41%. It is best suited for long-term growth investors with long-term investment horizons seeking capital appreciation by investing in a portfolio of equity securities in developing and emerging market economies.