Emerging Markets

Emerging markets offer higher growth but also more risk. Discover whether they fit your index fund portfolio and manage them with Index Balance.

Definition

Emerging markets are developing economies that show faster economic growth than developed countries but also carry greater political, regulatory and currency risk. Major emerging market indices include China, India, Brazil, Taiwan, South Korea, Saudi Arabia and Mexico, among others. The most widely used benchmark is the MSCI Emerging Markets index.

For the index fund investor, emerging markets offer geographic diversification and exposure to high-growth economies that account for more than 40% of global GDP but only 10–15% of global stock market capitalisation. The question is whether that greater return potential compensates for the higher risk: historically, emerging markets have been more volatile and have delivered poorer risk-adjusted returns than developed markets over the past few decades.

Index Balance lets you see the weight of emerging markets in your portfolio and compare it against your benchmark. Try it free at indexbalance.com.

Practical example

The iShares Core MSCI Emerging Markets IMI fund covers more than 3,000 companies across 27 emerging countries with a TER of 0.18%. In 2001–2010 it generated an annualised return of +15%, but in 2011–2020 only +3.6%, compared with +13.5% for the MSCI World. High volatility and political dependency lead many Boglehead investors to limit their emerging market exposure to 10–20% of their portfolio. Index Balance calculates this automatically every time you update your portfolio.