Indexy a trhy
Investing in Emerging Markets: Opportunities, Risks, and ETFs
Key takeaways
- Emerging Markets (EM) is a category of countries with faster economic growth but higher political, currency, and liquidity risk.
- More than 80% of the world's population lives in emerging markets, which generate a significant portion of global GDP — their weight in global portfolios is growing.
- UCITS ETFs tracking MSCI Emerging Markets or FTSE Emerging Markets are the most accessible and diversified way to gain exposure.
- Concentration in China is often very high within EM indices — a risk that cannot be ignored.
- The EM component complements a global portfolio, but for beginners it is sensible to start with a broad index fund (All-World) where EM is included automatically.
Emerging markets are not one specific place — they are dozens of countries that share the characteristic of faster economic development and a higher degree of risk relative to developed economies. They include China, India, Brazil, Mexico, South Africa, Turkey, Thailand, Indonesia, and many others. Understanding what this category means is essential before making any investment decision.
What is an "emerging market" and how is it defined?
Classification is carried out by index providers — primarily MSCI and FTSE Russell. They distinguish between Developed Markets, Emerging Markets, and Frontier Markets. A country enters the EM category based on economic size, accessibility for foreign investors, and capital market infrastructure. This classification changes occasionally — for example, South Korea and Poland have moved between EM and DM depending on methodology. The article on how stock indices work will help you understand this logic better.
Why invest in emerging markets?
The main argument is diversification and exposure to economic cycles different from those in the US and Europe. Emerging markets provide access to a rapidly growing middle class in Asia, Africa, and Latin America, to raw material commodities, and to technology giants such as TSMC or Samsung. Compared with developed markets, EM equities are often valued at a discount — historically because of higher risk.
Risks you need to know
Emerging markets carry specific risks that developed markets either do not have or have to a lesser degree:
- Currency risk: EM currencies are more volatile and typically depreciate against the dollar and euro during crises.
- Political and regulatory risk: Government changes, nationalisations, capital controls, or unexpected regulations (such as restrictions on Chinese tech firms) can cause rapid declines.
- Lower transparency: Accounting standards and investor protection tend to be weaker than in the US or EU.
- Liquidity risk: During panics, it can be harder to sell at a reasonable price.
How to invest via UCITS ETF?
The most accessible route is through an Irish-domiciled UCITS ETF tracking MSCI Emerging Markets or FTSE Emerging. These funds are available on European exchanges, have an Irish domicile that is advantageous from a tax perspective (see why Irish domicile), and cover dozens of countries at once. For those who do not want to manage EM separately, a global All-World ETF is a simple solution — EM is included automatically at a weight reflecting market capitalisation.
EM in the context of an overall portfolio
Emerging markets can form part of a diversified portfolio as a complement to developed markets. If you own VWCE or FWRG, you have EM exposure automatically. Adding a standalone EM ETF makes sense if you want to deliberately and consciously increase the weight of emerging markets. For guidance on overall allocation, see how to build your first portfolio.
FAQ
What is the difference between Emerging Markets and Frontier Markets?
Emerging Markets are more developed economies with more accessible capital markets (China, India, Brazil). Frontier Markets are even less developed, less liquid, and less accessible to foreign investors — Vietnam, Nigeria, Kenya. See also the article on Frontier markets.
Is China a risk in the EM index?
Yes. China is typically the largest component of MSCI EM. Geopolitical tensions, regulatory interventions (such as restrictions on Chinese tech firms), or an economic slowdown therefore affect the entire index disproportionately.
Should I choose MSCI EM or FTSE Emerging?
The main difference is the classification of South Korea — MSCI places it in EM, FTSE in developed markets. Otherwise the funds are very similar. Always verify current compositions on the index provider's website or on justETF.