Emerging market funds are investment vehicles that pool capital to buy stocks, bonds, or other assets in countries classified as emerging markets-nations with rapidly developing economies and increasing industrialization, such as India, Indonesia, Mexico, and South Africa.
These funds provide investors with diversified access to equities and debt instruments in regions where economic growth often outpaces developed nations. They are typically structured as mutual funds or exchange-traded funds (ETFs), allowing individuals to invest with smaller amounts than buying individual securities.
For example, the iShares MSCI Emerging Markets ETF (EEM) holds over 1,000 stocks across 24 countries, including major holdings in Tencent (China), Reliance Industries (India), and Petrobras (Brazil). This single fund gives exposure to nearly half the world's population and a growing share of global GDP.
Managers of emerging market funds select securities based on economic indicators, political stability, currency trends, and sector performance. They may focus on large-cap equities, small-cap growth stocks, or government and corporate bonds issued in local currencies.
Funds are priced daily in the case of mutual funds, or continuously throughout the trading day for ETFs. Investors can buy and sell shares through brokerage accounts, often with low minimums-some ETFs require only $100 to start.
A key factor affecting returns is currency risk. If the U.S. dollar strengthens against a country's local currency, even strong stock performance can result in lower returns when converted back to dollars. For example, in 2022, the Indian rupee fell 12% against the dollar while the Nifty 50 index rose 14%, leading to mixed net results for U.S.-dollar investors.
Investors choose among several fund structures based on strategy, geography, and asset class. The table below outlines common categories:
| Type | Focus | Example Fund | Annual Expense Ratio |
|---|---|---|---|
| Global emerging equities | Stocks across multiple emerging markets | iShares MSCI Emerging Markets ETF (EEM) | 0.68% |
| Regional focus | Single region, e.g., Latin America or Southeast Asia | SPDR S&P Emerging Asia ETF (EAZ) | 0.60% |
| Bond funds | Dollar- or local-currency-denominated debt | SPDR Bloomberg Emerging Markets Local Bond ETF (EMLC) | 0.50% |
| Thematic funds | Sector-specific, like clean energy or fintech | Global X China Clean Energy ETF (CHIQ) | 0.65% |
Some funds use passive indexing, tracking benchmarks like the MSCI Emerging Markets Index. Others follow active management strategies, where fund managers make decisions based on research and forecasts. Active funds tend to have higher fees-often above 1% annually-but aim to beat benchmark returns.
Many emerging market funds hold significant stakes in state-owned enterprises. In China, for instance, the top 10 holdings in the MSCI Emerging Markets Index include companies like Sinopec and China Mobile, which are partially controlled by the government. This introduces unique governance risks not seen in private-sector-dominated markets.
Investors use emerging market funds to diversify portfolios beyond traditional U.S. and European equities. Over the past decade, emerging markets have delivered average annual returns of 8.4% compared to 7.1% for developed markets, according to Morningstar data from 2013-2023.
They serve as a hedge against inflation and currency devaluation in developed markets. During periods of high U.S. inflation, such as 2022, emerging market equities outperformed developed markets in 12 of 15 months, driven by stronger domestic demand and lower interest rate sensitivity.
However, volatility remains high. In 2020, during the early stages of the pandemic, emerging market equity funds dropped 30% in March-the steepest decline since the 2008 crisis. This reflects sensitivity to global risk sentiment and capital flight during uncertainty.
Many assume all emerging market funds are high-risk. That's not accurate. Funds focused on stable economies like South Korea or Taiwan have shown lower volatility than those in volatile regions such as Turkey or Argentina.
Another error is equating "emerging" with "small." While many emerging markets are less mature financially, they host large, liquid markets. India's stock market, for example, had a combined market cap of $3.2 trillion in 2023-larger than Canada's and comparable to Germany's.
Some investors believe these funds are only suitable for long-term holding. But tactical allocations can be effective. In 2021, a 5% allocation to emerging market equities improved portfolio risk-adjusted returns by 1.3% annually, according to a 2022 study by the Journal of Portfolio Management.
Consider a 40-year-old investor with $100,000 to allocate. They build a portfolio using 60% U.S. equities (via VTI), 20% international developed markets (VXUS), and 20% emerging markets (EEM).
Over five years, this mix returned 7.8% annually. Without the emerging market portion, the return was 6.9%. The added exposure contributed 0.9 percentage points to total growth, despite experiencing greater drawdowns during crises.
This shows that emerging market funds aren't just speculative-they can improve long-term returns when integrated thoughtfully.
When evaluating funds, review the underlying holdings, expense ratio, and geographic concentration. Tools like Morningstar's fund rating system or the SEC's EDGAR database help assess transparency and performance history.