An emerging-markets equity fund is an investment vehicle holding a collection of stocks from countries with young stock markets. Many have significant positions in China, India, and Brazil.
What is an emerging-markets equity fund?
- Like most international stock funds, these funds tend to hold currency risk and local policy risk.
- Emerging-markets stocks tend to be volatile because of the lack of legal, political, and technological infrastructure.
Emerging-markets stocks can provide effective diversification to a portfolio. Some emerging-market economies are growing at a fast pace, so investing in these regions can provide high return potential. However, their limited infrastructure and political systems create risk other economies might not have.
Because holding individual stocks is risky, a safer way to gain exposure to this asset class is through a collection of stocks. Like their developed-market equity fund counterparts, they present currency risk and local economic policy risk that domestic stock funds don’t have. Emerging-markets stock funds can be active or passive funds. Some researchers argue this asset class benefits from an active management (individual stock-picking) approach rather than tracking a broadly diversified index fund. They argue that emerging-markets stocks are less followed, so there is a greater possibility these stocks are mispriced, presenting more attractive opportunities.