Does the Fund Own Emerging-Markets Stocks?

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Does the Fund Own Emerging-Markets Stocks?

Many of the best-performing international funds have kept a good slug of their assets in emerging-markets stocks, or stocks of companies domiciled in smaller or less developed markets, such as India, Chile, or Russia.

Why own emerging-markets stocks?

Owning emerging-markets stocks has its benefits. First, they can generate robust returns: the MSCI Emerging Markets Index soared a phenomenal 64% one year, fueled by the Asian tech boom that took much of the investing public by surprise. Emerging-markets stocks also add more diversity to a U.S. portfolio than stocks from many of the more-developed international markets, such as Germany and the United Kingdom, do. That’s because the returns of the U.S. market and other developed markets tend to move in tandem.

But beware the dangers

There’s a price for emerging-markets stocks’ exhilarating highs and diversification, though: the threat of steep losses. One year, for example, the MSCI Emerging Markets Index was in a free fall: it had shed 19% in the preceding six months. The developing world suffered currency collapses and soaring inflation, and investors’ returns suffered. If oscillating fortunes make you sweat, limit your search to funds that are light on emerging-markets stocks.

It is hard to avoid emerging markets

If you’re trying to avoid emerging markets, you’ll need to be vigilant; after all, most diversified international funds nibble at emerging-markets stocks. In fact, the average fund in the foreign-stock category holds a small percentage of them. Your best bet is to find out which countries a fund frequents. Funds that go shopping in Europe, the U.S., and Japan are focusing on developed markets. But if you see a number of companies from countries in Latin America or the Pacific region, you’ll know that the fund is venturing into emerging markets.