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Fund Spy

Stay Away from This Emerging-Markets Play

Buying closed-end funds at huge premiums can lead to nasty surprises.

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When you buy an emerging-markets fund, you take on extra risk. Although there are plenty of stable, solid companies available in emerging markets, and the governments of many such countries have improved their financial management over their years, the currencies of those countries are still more vulnerable to swings, and they harbor a greater amount of political risk. For example, government instability or sharp policy shifts can play havoc with currencies and stock markets alike.

True, the recent coup in Thailand and the current political turmoil in Mexico have not led to plunging markets or currencies in those countries. At least, not so far. But those events do serve as timely reminders of the risks found in emerging markets that you don't find in, say, Switzerland.

With that in mind, adding even more risk to the equation is a questionable move to make. But some people do just that. Instead of buying a broadly diversified emerging-markets fund--one that can invest all over the developing world--they'll buy one that invests in just one region or one country. If trouble hits that region or country, such funds can't shift their assets to more stable areas.

Gregg Wolper does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.