What is an 'Emerging Market Fund'

An emerging market fund is a fund that invests the majority of its assets in securities from countries classified as emerging. These countries are in an emerging growth phase and offer high potential return with higher risks than developed market countries.

BREAKING DOWN 'Emerging Market Fund'

Emerging market funds are an attractive investment for growth investors. They can include securities from varying asset classes offering a range of options across the risk spectrum.

Across the world, companies are typically categorized as developed, emerging or frontier. Emerging market countries offer higher return with higher risk relative to developed market countries. They are usually considered more stable than frontier markets. Emerging market countries can be identified by market index providers and are defined by various characteristics.

Index provider MSCI provides the following list of emerging market countries.

Emerging Market Countries

Europe, Middle East and Africa
Czech Republic
South Africa
United Arab Emirates

Emerging market country infrastructures and economies vary broadly across the world. These countries are in a high growth phase with rapidly expanding and improving market environments. Factors influencing their classification include macroeconomic conditions, rapidly increasing GDP rates, political stability, capital market processes, and financial market trading and settlement procedures. Many emerging market economies are also experiencing significant growth from middle class consumers helping to drive increased demand across business sectors. Overall, the potential for rewarding investment opportunities in this category of fund comes with relatively high risks.

Emerging Market Fund Investments

Emerging market funds seek to capitalize on the return opportunity presented by emerging market economies. Funds may invest in emerging market debt or equity to build a diversified fund offering for investors. Numerous debt and equity options are available for investors seeking to invest in a single country or a diversified portfolio of emerging market countries. In the emerging markets category investors will also find both passive and active funds providing emerging market exposure across the market segment.

Emerging Market Debt

Emerging market debt can offer the least risk among emerging market investments. Credit quality is a leading objective that differentiates emerging market debt funds, providing access to debt investments with varying levels of risk. Investors can invest in both passive and active funds. Leading indexes for passive market investment include the J.P. Morgan Emerging Markets Bond Index and the Bloomberg Barclays Emerging Market Aggregate Index.

The American Funds Emerging Markets Bond Fund is a top investment for investors seeking emerging markets debt exposure. For the one year period through November 30, 2017 the Fund had a return of 10.32%. This fund is actively managed and invests in emerging market government and corporate bonds. Its top holdings are in Mexico, Turkey and Brazil.

Emerging Market Equity

Emerging market equity encompasses a broad range of companies from emerging markets around the world. Investors can invest in passive indexes for emerging markets exposure or seek actively managed funds. Top indexes include the MSCI Emerging Markets Index and the S&P Emerging Markets Broad Market Index.

The American Century Emerging Markets Fund is one example of an emerging markets equity fund. The Fund is actively managed and uses fundamental analysis to choose stock investments for the portfolio. As of November 30, 2017, it had a one year return of 40.46% versus its benchmark, the MSCI Emerging Markets Index, with a return of 32.82%.

Asia ex-Japan and BRIC Countries

The emerging markets also offer market segments that are attractive for investment. Asia ex-Japan emerging market funds will include securities from Asia excluding Japan. This region offers exposure to the Asian emerging markets. Similarly BRIC funds will include securities from Brazil, Russia, India and China. The BRIC countries are known to be four of the most dominant economics in the emerging markets.

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