Emerging Market Fund

What Is an Emerging Market Fund?

An emerging market fund refers to a fund that invests the majority of its assets in securities from countries with economies that are considered to be emerging. Funds that specialize in emerging markets range from mutual funds to exchange-traded funds (ETFs). These countries are in an emerging growth phase and offer high potential returns with higher risks than developed market countries.

Emerging market funds typically specialize in either fixed-income or equity securities from these regions.

How an Emerging Market Fund Works

The infrastructures and economies of emerging market nations vary broadly across the world. These countries are in high-growth phases with rapidly expanding and improving market environments. Factors influencing their classification include macroeconomic conditions, rapidly increasing gross domestic product (GDP) rates, political stability, capital market processes, and financial market trading and settlement procedures. Many emerging market economies also experience significant growth from middle-class consumers who help to drive increased demand across business sectors.

An emerging market fund is a type of mutual fund or ETF, which invests heavily in securities of varying asset classes—stocks, bonds, and other securities—from developing or emerging market economies. The most common places where these funds invest in include India, China, Russia, and Brazil. Below, you'll find a more comprehensive list of emerging market nations.

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. Funds offer a range of options across the risk spectrum—currency risk, inflation risk, political risk, and liquidity risk, among others—and are generally attractive investments for growth investors.

Special Considerations

Companies are typically categorized based on where their economies are in terms of development—developed, frontier, or emerging. Developed nations, also referred to as industrial nations, have fully developed economies with infrastructure that is technologically advanced. Frontier economies are slightly less developed than a fully industrialized nation, but a little more than an emerging economy.

Then there are the emerging market economies. As noted above, these countries offer higher returns 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.

The emerging markets also offer market segments that are attractive for investment. Asia ex-Japan emerging market funds 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.

Types of Emerging Market Fund Securities

Here's a look at some of the most common types of securities that make up emerging market funds on the market.

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 Emerging Markets USD Aggregate Index.

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 Global Broad Market Index.

Examples of Emerging Market Funds

The American Funds Emerging Markets Bond Fund (EBNAX) is a good investment for investors seeking exposure to emerging market debt. This fund is actively managed and invests in emerging market government and corporate bonds. As of 2022, its largest holdings were in Mexico, Russia, and China.

The American Century Emerging Markets Fund (TWMIX) is an 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 Q1 2022, the fund's top countries were in three emerging market countries including China at 43%, Taiwan at 14%, and South Korea at 13%.