HOW TO TAKE ADVANTAGE OF EMERGING FOREIGN MARKETS
Have you ever noticed that the US stock market (Foreign Markets) does well when the country is doing well overall? When the economy is doing poorly, the stock market goes down as well.
The good news is that there’s almost certain to be a country somewhere with a thriving economy.
By investing in companies that are in growing economies, you have a much better chance of crafting a profitable portfolio.
If your current portfolio includes large-cap stocks or a fund that invests in large-cap stocks, you’re already getting some indirect exposure to emerging markets in other countries.
Many US companies earn a lot of their profits from the ever-growing consumer class in China, for example.
Take a look at your current foreign holdings. Your typical large
international stock fund currently has about 12 percent of its holdings invested in countries with emerging markets.
If you want greater exposure to these emerging markets, there are several options available to you:
1. Professionally managed funds. Actively managed funds are available for those that want an expert money manager.
‣ This type of fund is perfect for many investors. You have an expert investing your money for you and don’t have to worry about trying to figure out everything yourself.
‣ Some examples of actively managed funds would include T. Rowe Price Emerging Markets Stock Fund (PRMSX) and American Funds New World Fund (NEWFX). Of course, there are many others.
2. Index funds. Passively managed index funds are available to those that want broad-based exposure without the expense of professional management.
‣ If you’re primarily interested in a given foreign economy or don’t want the expense of professional management, then an index fund is what you want.
‣ An example of this type of fund is the Vanguard Emerging Markets Index (VEIEX).
‣ With an index fund, you also don’t have to worry about keeping up with individual stocks.
‣ Over the long haul, index funds tend to outperform other types of funds.
3. ETFs. ETFs offer more flexibility to those that want to invest
in a variety of countries. An exchange-traded fund (ETF) is similar to an index fund. The primary difference is that it is priced and traded throughout the day like a stock, while index funds are only priced at the end of the trading day.
‣ One of the most popular ETF funds of this type is the Vanguard Emerging Markets ETF (VWO).
4. Country-specific funds. For many countries, there are mutual funds in the US dedicated to that single country.
5. Specific stocks. If you’re more experienced in managing your own portfolio of stocks, you can invest in foreign stocks. It is not unlike investing in US companies, but beware of the following differences:
‣ Lack of reliable information. This will not be true for all countries, but many countries don’t have the same standards of reporting found here in the US. You might not be able to find the information you need, and the information you find might be of questionable accuracy.
‣ Currency risk is a real issue. It’s possible to purchase a foreign stock and realize a 50% profit based on stock price but actually have lost money because the country’s currency has lost significant value against the US dollar.
You could also make money when the stock price has fallen.
‣ Lack of liquidity. Some markets don’t move very quickly, and it can sometimes take days (or longer) to buy or sell that foreign stock. You might want to buy today, but by 4 the time your order goes through, the price has risen. The opposite can happen when trying to sell.
‣ The most convenient way to buy shares in a foreign country is to set up a brokerage account there. In many countries, it may be the only way. You can ask your broker for advice or check out your options online.
6. Shares in larger foreign companies. Keep in mind that shares in larger foreign companies, like Toyota, can be bought on the larger stock exchanges around the world, like the NYSE, for example. These are not technically stock shares, but they are essentially 100% equivalent from the perspective of the investor.
‣ Research ‘American depository shares’ for more information about this type of investment.
Emerging markets can be a relatively easy place to make money. When a country’s entire economy is doing well, the stock market tends to do well overall. Just because the US is struggling doesn’t mean the rest of the world is, too.
An important note: It is not recommended for the average investor to attempt to own individual foreign stocks that are not available on the major domestic stock exchanges. There are many risks, including currency risk.