Emerging Markets Versus International Stock Mutual Funds
Invest In One, Both or Neither?
Investors have many choices when it comes to international stock mutual funds. It is easy to get confused over the various types and categories, which have similar names like world stock, global funds, Europe stock, emerging markets and foreign stock.
In this article, we'll clarify the difference between emerging markets stock and international stock. But before we go further, it is important to clarify that international stock, with regard to mutual funds and ETFs, is not commonly used as a specific fund category but rather an overall description of funds that invest outside of the United States.
For this reason, when most people say "international stock," they are referring to what is most commonly categorized as "foreign stock." Therefore we will primarily use the term foreign stock in this article.
What Are Emerging Markets?
Emerging Markets are countries with rapidly growing economies but are generally "less developed" than the largest nations in the world such as the United States and those of western Europe. Some of the largest countries considered to be emerging markets include China, India, Russia, Brazil, and Mexico.
In general, the market risk is higher for emerging markets than that of more developed countries. The reason for this risk is usually due to political risk or unrest, questionable accounting standards or unstable currencies. However, the higher relative risk is thought to provide higher potential returns.
Emerging Markets Investing Versus International Stock Investing
Most investors deciding between buying emerging markets funds or some other international stock funds choice, such as foreign stock, are looking for higher returns.
Due to the higher relative risk, most investors might also assume that emerging markets funds tend to do better in the long run than foreign stock funds that don't concentrate on emerging markets. While it is true that emerging markets funds can see extremely high returns in the short term, they can also see extremely low returns in short periods of time.
For example, looking back to a recent global recession and recovery, the average emerging markets fund fell nearly 50% in the midst of the global financial crisis in 2008. But when the recovery began in 2009, emerging markets funds shot up 65% or more.
Emerging Markets or Foreign Stock Funds: Invest in One, Both, or Neither?
Any kind of international stock fund, whether it is emerging markets or foreign stock, can be a smart part of a diversified portfolio of funds. Investors should be careful not to have more than 20% total exposure to stocks outside of the U.S. So for complete international coverage, an investor may want to choose half emerging markets and half foreign stock, or 10% each.
Also, keep in mind that many foreign stocks invest in emerging markets countries. Therefore, one good foreign stock fund may already have sufficient exposure to emerging markets. Another option is to invest in a Europe stock fund and compliment it with an emerging markets fund.
But then some investors choose not to invest in any kind of international stock. It is certainly possible to have a diversified portfolio without it, especially considering how global economies are in the modern world.