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How to invest in Emerging Markets through ETFs and ADRs

If you’re not a citizen of countries like India or Indonesia – it’s difficult to invest in their public markets. However there are a few ways around that.

If you’re not a citizen of countries like India or Indonesia – it’s difficult to invest in their public markets. However there are a few ways around that.


By 2050 China and India will be the largest and second largest economy in the world. Indonesia, Brazil, Russia, and Mexico will be the fourth, fifth, sixth, and seventh respectively. 

Emerging Markets, and the companies in them, are growing faster than any of the ones you are currently invested in. If you’re a risk taker, wish you bought Amazon in 2010 and held it until now, or are just trying to find the companies that will define the next decade, you should be invested in Emerging Markets.

The challenge is that companies in Emerging Markets are more difficult to invest in for people like you and me. Most companies are private or trade on the country’s local stock exchange – which means that you need to be a citizen to buy them.

However, there are a few ways around that barrier which will allow you, as a retail investor, to get in on the action. I’ve separated them into three sections below for beginner, moderate, and advanced investors.


Beginner: Large ETF’s

These large ETFs represent emerging markets as a whole. They incorporate benchmarks from the MSCI or other research firms that are considered to be the gold standard in non-US equities and include stocks from companies all around the world. 

These large ETF’s are the place to start if you don’t have the time to investigate specific countries and just want to place your money where the most economic growth is happening. Below are three large ETFs you can invest in that cover a broad set of companies with slightly different angles.

($IEMG) iShares Core MSCI Emerging Markets ETF 

Includes countries on the MSCI benchmark and includes exposure to smaller cap stocks that are typically ignored by funds that only focus on large cap stocks. Consists of 26 developing economies, including Brazil, China, Egypt, Greece, India, Mexico, Pakistan, Russia, Saudi Arabia, and South Africa

($EMQQ) Emerging Markets Internet & Ecommerce ETF

Exposure to the growth in Internet and Ecommerce activities in the developing world. This ETF tracks an index of leading Internet and Ecommerce companies that includes online retail, search engines, social networking, online video, e-payments, online gaming and online travel. While heavily weighted towards China, it includes companies like Ping An Health Care (largest telehealth company in China) and Naver (Large Korean Media Conglomerate that just acquired Wattpad).

($FNI) First Trust ISE Chindia Index Fund

If you’re looking to get a little more specific, this ETF offers a one stop option for exposure to two of the world’s most promising emerging markets, China and India. FNI might be appealing as a tool for beginner investors looking for a more specific emerging markets exposure.


Moderate: Country Focused ETF’s

If you’ve started to research specific countries within Emerging or Frontier markets, or are a subscriber to our newsletters, you’ll notice that there are a number of countries outside of China that are promising prospects. Some of those countries are Nigeria, Saudi Arabia, and Indonesia – details of which are in this article (link other article).

Many of these countries have specific ETF’s that trade on the NYSE and focus on large or small cap companies within those countries. I’ve listed a few of them below – but I encourage you to do your research. These ETF’s hold a specific set of companies within a country. Before investing, ensure that the companies held by an ETF match your investment thesis.

Nigeria

($NGE) Global X MSCI Nigeria ETF

The fund tracks an MSCI index of the largest and most-liquid Nigerian companies. The portfolio includes about 20 stocks of companies that are either based in Nigeria, listed on Nigerian markets or whose revenues are primarily from the country.

India

($INCO) Columbia India Consumer ETF

Ongoing urbanization and increases in levels of wealth and discretionary income stand to benefit India’s consumer sector tremendously; a rising middle class will translate into greater expenditures on consumer goods and services. INCO focuses on this Indian consumer sector. While the holdings are concentrated in this sector, it should be noted that INCO includes a number of different types of companies, such as car manufacturers, food and beverage companies, and hotel and leisure firms.

($INDY) iShares India 50 ETF

This ETF offers investors a way to access the Indian equity market at a basic level. INDY tracks 50 of the largest companies in the nation and gives you broad exposure to their large cap stocks like Reliance or Tata. 

($SMIN) iShares MSCI India Small-Cap ETF

SMIN offers exposure to a portfolio of nearly 240 small cap Indian stocks, meaning that this fund may serve as a better “pure play” on the Indian economy than products dominated by large cap equities such as INDY. SMIN can exhibit significant volatility in the short term, but its long term potential is tremendous, especially if India’s economy continues to expand at an impressive rate.

Saudi Arabia

($UAE) iShares MSCI UAE ETF

Exposure to a broad range of companies in the United Arab Emirates (UAE). Targeted access to UAE stocks.

Indonesia

($EIDO) iShares MSCI Indonesia ETF

EIDO offers investors exposure to the emerging market of Indonesia by investing in securities of companies that are based in the nation.

($IDX) VanEck Vectors Indonesia Index ETF

IDX offers investors exposure to the Emerging market of Indonesia by investing in securities of companies that are based or do a great deal of business in the nation. 

China

($FXI) iShares China Large-Cap ETF

FXI is the most popular ETF option for achieving exposure to the Chinese equity market. There are, however, some drawbacks to FXI: the portfolio consists of just a handful of large cap stocks and maintains heavy biases towards certain industries (financials and energy, while going light on tech and consumer stocks).

($CHIX) Global X MSCI China Financials ETF

This ETF offers exposure to China’s financial sector. Those looking to invest in China’s financial market may find this ETF useful for fine tuning exposure, especially those expecting strong performance from banks and other financial services companies.

($ECNS) iShares MSCI China Small-Cap ETF

This ETF offers exposure to small cap Chinese stocks, an asset class that is generally overlooked, even by investors with significant exposure to Chinese equity markets. The majority of China-specific funds and emerging markets ETFs are dominated by large cap stocks, and often exhibit a significant bias towards the energy and financial sectors. ECNS does not share those biases, making this fund a potential complement or alternative to large cap-heavy ETFs


Advanced: ADR’s (American Depository Receipts)

Given the number of hurdles it takes for an international company to register with the SEC and list onto an American stock exchange – many foreign companies decide not to do it. However, over the years, investors have found creative ways to offer shares (or as close as you can get to shares) of a company without needing to jump through the regulatory hoops. The main way they do this is through ADRs.

ADRs are one of the most convenient and popular ways to buy shares of foreign companies . Some common ones that you may already be invested in are Alibaba ($BABA), Novartis ($NVS), or British Petroleum ($BP). A quick video explaining how they work is below.

There are a large number of ADRs available but it is important to do your research on both the ADR in addition to the company. It is also important to remember that owning an ADR does not mean that you own a share of the company, it is simply a way to participate in the same gains that you would if you did. I’ve linked some larger lists of ADR’s organized by country below.


Conclusion

A key part of investing in emerging markets is understanding what is happening in the country you are planning to invest in. This involves connecting the dots between the economic developments, political developments, and consumer behavior.

Some of my favorite publications to follow are The Economist, Quartz Africa, and the Tech News Asia. Or you can subscribe to our newsletter below where we send a monthly roundup of the best articles in addition to putting the insights on Emerging Markets together for you.

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