Is Now the Time to Invest in Emerging Markets?
Emerging-markets stock ETFs offer exposure to higher-growth markets, but they also can be volatile. Here is a look at the pros and cons of these investments.
5 min
For some investors seeking to diversify their portfolios, emerging markets are looking increasingly attractive.
There are 169 emerging-markets stock ETFs available to fund investors, with total assets of about $296 billion, according to fund researcher Morningstar Direct.
Some analysts and financial advisers say there is a lot to like about this sector right now. What is the argument for putting money into these exchange-traded funds? And what’s the argument for getting out, or not starting at all? Here’s a look at the pros and cons.
The Pros
One factor driving interest in emerging-markets ETFs is that emerging economies are growing faster than advanced economies, and that isn’t forecast to change soon. The International Monetary Fund forecasts real GDP growth of only 1.4% in advanced economies in 2024 due to inflation, monetary policy and other factors. In contrast, the IMF projects real GDP growth of 4.1% for emerging and developing economies, helped by countries such as India, which is expected to grow at a rate of 6.3%.
“The biggest reason to invest in emerging-markets ETFs today is to gain exposure to high-growth markets with burgeoning middle-class consumers such as China, India, Mexico, Taiwan, South Korea and Vietnam,” says Aniket Ullal, senior vice president and head of ETF data and analytics at CFRA Research. He says emerging markets are home to more than 4.3 billion people, and they account for about half of global GDP.
Another attraction is that valuations on emerging-markets stocks are low. While the price-to-earnings ratio of the S&P 500 was 22.4 based on trailing 12-month reported earnings as of July 31, the P/E ratio of the MSCI Emerging Markets—which includes the stock of most liquid large- and midcap companies in 25 emerging-market countries—was 14.13.
“This is a smart contrarian play for investors who want to diversify their portfolios geographically,” says Gabriel Shahin, president of Falcon Wealth Planning, an investment adviser in Los Angeles. “There is a fire sale going on in emerging-market stocks, and this is one of the smartest plays in equity investing right now.”
Some see these investments as a hedge, considering this year’s U.S. stock rally—dominated by a small number of large-cap technology companies—could end at any time.
Emerging-markets ETFs come in many varieties, so investors can choose those that align with their macroeconomic outlook and financial goals.
While some of these funds invest in a broad basket of emerging-market countries that span the globe such as the $72.1 billion iShares Core MSCI Emerging Markets ETF (IEMG), others invest in geographic regions such as Asia or Latin America or are country-specific.
The $64.2 million Franklin FTSE Latin America ETF (FLLA), for example, invests in large-cap and midcap companies in Brazil, Chile, Colombia and Mexico. It has returned more than 19% year-to-date through Aug. 29 and 15.6% over the past year. The $175.8 million Franklin FTSE Taiwan ETF (FLTW) invests in midcap and large-cap Taiwanese companies. It has a year-to-date return of 14.7% and a one-year-return of 8.2% as of Aug. 29.
For investors concerned about the economic slowdown in China, there are emerging-markets ETFs that exclude Chinese equities such as the $5.16 billion iShares MSCI Emerging Markets ex-China (EMXC). Its top holdings are Taiwan Semiconductor Manufacturing, Samsung Electronics and Reliance Industries.
Some emerging-markets ETFs target small- or large-cap stocks. One is the $34.2 million VanEck Brazil Small-Cap ETF (BRF), which is up about 32% year-to-date and 11.4% over one year as of Aug. 29. Others focus on industry sectors such as technology and e-commerce.
While most emerging-markets equity ETFs track indexes, an increasing number of newer funds are actively managed. Of the 11 emerging-markets ETFs that have launched this year, eight are actively managed, including Global X Brazil Active ETF (BRAZ), a $2.61 million fund that invests in Brazilian companies such as Petrobras, a multinational petroleum company, and Vale, the world’s largest iron-ore producer.
There are even emerging-markets ETFs that pay dividends, such as the $243.5 million SPDR S&P Emerging Market Dividend ETF (EDIV), which is up 28.2% year-to-date through Aug. 29 and has a dividend yield of 3.78%.
According to Morningstar Direct, the top-performing emerging market ETFs this year through Aug. 29 are VanEck Brazil Small-Cap, SPDR S&P Emerging Market Dividend and iShares MSCI Brazil Small-Cap (EWZS), which is up 24.1% so far this year and 5.7% over one year.
The Cons
Some advisers, however, say investors looking at emerging-markets equity funds should proceed with caution.
“Emerging-markets equity ETFs are more volatile than international ETFs that focus on stocks in advanced economies,” says Lan Anh Tran, a research analyst at Morningstar Direct. Over the past 10 years ended July 31, 2023, the standard deviation of the MSCI Emerging Market Index was 16.2% higher than the MSCI World Index—a proxy for global developed-market stocks, she notes. Standard deviation measures volatility, with a higher number representing more volatility.
That’s because any sudden geopolitical event (such as the war in Ukraine) or any economic shock (like soaring inflation or a global supply-chain disruption) can have a jarring effect on emerging-market economies that are dependent on commodity exports, tourism and the health of advanced economies, investment strategists say.
There also is the risk of government influence and regulation on emerging-markets stocks, says Tran. A government, for example, can decide to nationalize an industry at any time, or exercise control over an industry sector.
Currency movements are another risk factor to consider, says CFRA’s Ullal. “If the dollar strengthens against local currencies, your fund returns will erode,” he says.
“It’s important that investors understand this is a high-risk, high-reward investment before they dive into them,” says Andrew J. Feldman, the founder of A.J. Feldman Financial in Chicago. “These funds can be highly volatile due to a host of systemic risks in emerging-market countries, including economic risk, geopolitical risk, currency risk and liquidity risk.”
These challenges make some investors skittish about investing in emerging-markets ETFs, says Kevin Shuller, founder and chief investment officer of Cedar Peak Wealth Advisors in Denver. “They believe that companies domiciled in the U.S. do a lot of business in emerging markets, so if you own the S&P 500 or MSCI EAFE index you have all the exposure you need.”
“It’s a good counterargument,” he says, “but [it] doesn’t take into account that the party in the U.S. stock market may not go on forever.”
Many investment advisers instead suggest individual investors take a step-by-step approach when choosing an emerging-markets ETF and allocate 5% to 10% of their equity portfolio in such vehicles.
“Country selection matters most so check the fund’s geographic exposure,” says Perth Tolle, founder of Life + Liberty Indexes and the $625.4 million Freedom 100 Emerging Markets ETF (FRDM), which invests in about 100 companies in 10 countries that aren’t autocracies but freer markets such as Chile, Poland, South Korea and Taiwan.
Also look at the methodologies and metrics the ETF uses when choosing stocks for its index or portfolio, as well as the fund fees. The average expense ratio for this ETF group is 0.51%, according to Morningstar Direct.
“A good way to assess a fund’s value is to look at its weighted average price to cash flow,” a measure of the price of a company’s stock relative to how much cash flow it generates, says Kevin Grogan, chief investment officer at Buckingham Wealth Partners in St. Louis. It gives a pulse reading on how cheap or expensive the emerging-markets stocks are in the fund.
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Quantum computing is moving from theory to real-world investment. Professor David Reilly says it could reshape finance, security and global technology infrastructure.
3 min
For decades, the world’s computing power has quietly expanded at an astonishing pace.
From the first transistor developed at Bell Labs in 1947 to modern processors containing billions and even trillions of transistors, each generation of technology has been faster, smaller and more powerful than the last.
But according to quantum physicist and technology entrepreneur David Reilly, that era of effortless progress is beginning to slow.
Reilly, CEO of Sydney-based Emergence Quantum and Professor of Physics at the University of Sydney, says the computing infrastructure underpinning modern economies is approaching fundamental physical limits.
And that could have enormous implications for finance, artificial intelligence and global investment.
Speaking at an industry event organised by Kanebridge International, Reilly said many critical parts of modern society depend on computing and the infrastructure used to process information.
The slowdown behind the tech boom
For years, the technology industry relied on a steady improvement known as Moore’s Law, where the number of transistors on a chip doubled roughly every two years.
More transistors meant more computing power, allowing faster software, smarter devices and ever-larger data systems.
Today, however, those gains are slowing.
“It feels to me very innate that I’m going to just find that next year there’s going to be another breakthrough,” Reilly said.
“But if you look at the data…there’s a slowing down, a roll off in performance that started some 10, 20 years ago.”
Rather than making chips dramatically faster, manufacturers are now largely increasing computing capacity by packing more transistors onto each processor.
The approach works, but it comes with growing complexity, higher costs and increasing energy demands.
The brute-force race for AI
That challenge is already visible in the massive data centres being built to support artificial intelligence.
In the race to dominate AI, companies are constructing vast computing facilities that consume huge amounts of electricity and water. Reilly described this expansion as a “brute force” approach driven by the global competition to develop advanced AI systems.
Yet the demand for computing power continues to accelerate.
Artificial intelligence, advanced robotics, healthcare research, pharmaceuticals and cybersecurity all require far more processing capacity than today’s systems can easily deliver.
The question now facing the technology sector is whether traditional computing can keep up.
Enter quantum computing
That is where quantum computing enters the conversation.
Unlike conventional computers, which process information using binary switches that represent ones and zeros, quantum computers exploit the unusual behaviour of particles at the atomic scale.
Reilly describes them as a fundamentally different type of machine.
“So a quantum computer is a wave computer,” he said.
Instead of processing information through simple on-off switches, quantum systems can use wave-like properties of particles to process many possible outcomes simultaneously.
Those waves can interact in complex ways, reinforcing correct solutions while cancelling out incorrect ones. In theory, this allows quantum systems to tackle certain types of problems dramatically faster than classical computers.
What it could mean for finance
The concept may sound abstract, but its potential applications are significant.
Quantum computers are expected to transform areas such as materials science, chemical modelling and pharmaceutical development.
They could also help solve complex optimisation problems in logistics, finance and risk management.
For financial institutions in particular, the technology could offer new tools for detecting fraud, analysing market behaviour and optimising portfolios.
But the shift will not happen overnight.
“One message to take away is that quantum is not going to suddenly solve all of your problems,” Reilly said.
Instead, he said quantum systems will likely complement existing computing technologies as part of a broader and more diverse computing ecosystem.
Why data centres may soon “go cold”
One key change already emerging is how computing systems are physically designed.
Many next-generation technologies, including quantum processors, operate far more efficiently at extremely low temperatures. As a result, future data centres may rely heavily on cryogenic cooling systems to manage heat and energy consumption.
Reilly believes that the shift will gradually reshape the computing industry.
“Over the next five years, you’re going to see data centres go cold,” he said.
“And as that happens, they almost drag with them new compute paradigms.”
Emergence Quantum, the company he co-founded, is focused on developing technologies to support that transition, including cryogenic electronics and integrated hardware platforms designed for quantum computing and energy-efficient systems.
A new technological era
For investors and businesses, the technology remains in its early stages. But the scale of global interest is growing rapidly.
Governments, research institutions and technology companies are investing heavily in quantum research, betting it could become a foundational technology for the next generation of computing.
For Reilly, the moment feels similar to earlier technological turning points.
In the 19th century, new discoveries in thermodynamics helped drive the development of steam engines and the Industrial Revolution. In the 20th century, advances in electromagnetism led to radio, television and eventually the internet.
Quantum physics, he suggests, could represent the next chapter in that story.
“Today we have, as a society, in our hands new physics that we’re just beginning to figure out what to do with,” Reilly said.
“But I think it’s an exciting time to be alive and watch what happens over the coming decades.”
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