Are emerging market ETFs risky? (2024)

Are emerging market ETFs risky?

Emerging markets, as defined by MSCI, are 24 developing countries with volatile, fast-growing economies. Emerging market investments can provide diversification and potentially rapid growth to a portfolio, but they can also be risky. TUR and GLIN are among the best-performing emerging market ETFs this year.

In a benign economic environment, investors are often willing to stretch into riskier segments of the bond market in search of higher yields. However, emerging-market (EM) local-currency bonds typically are more volatile and carry higher risks than developed market bonds.

Market risk

The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.

Key Takeaways. ETFs are less risky than individual stocks because they are diversified funds. Their investors also benefit from very low fees. Still, there are unique risks to some ETFs, including a lack of diversification and tax exposure.

ETFs are considered to be low-risk investments because they are low-cost and hold a basket of stocks or other securities, increasing diversification. For most individual investors, ETFs represent an ideal type of asset with which to build a diversified portfolio.

Emerging market investments can provide diversification and potentially rapid growth to a portfolio, but they can also be risky. TUR and GLIN are among the best-performing emerging market ETFs this year. You may also be able to buy individual emerging market stocks, although this may not be right for every investor.

Emerging markets may have unstable, even volatile, governments. Political unrest can cause serious consequences to the economy and investors. Economic risk. These markets may often suffer from insufficient labor and raw materials, high inflation or deflation, unregulated markets and unsound monetary policies.

Buying high and selling low

At any given time, the spread on an ETF may be high, and the market price of shares may not correspond to the intraday value of the underlying securities. Those are not good times to transact business.

Yes, an inverse ETF can reach zero, particularly over long periods. Market volatility, compounding effects, and fund management concerns can exacerbate losses. To successfully manage possible risks, investors should be aware of the short-term nature of these securities and carefully monitor their holdings.

In the short term, an S&P 500 ETF will still experience volatility. But investing is a long-term game, and over years and decades, this type of investment is extremely likely to pull through even the worst economic downturns.

What happens if ETF collapses?

Because the ETF is a separate legal entity from the issuer that manages it, the ETF will control all the assets in its portfolio up until the date set for its liquidation, at which point the manager will sell the assets and distribute the proceeds to investors.

Indexed ETFs, tracking specific indexes like the S&P 500, are generally safe and tend to gain value over time. Leveraged ETFs can be used to amplify returns, but they can be riskier due to increased volatility.

Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.

ETFs are designed to track the market, not to beat it

But many ETFs track a benchmarking index, which means the fund often won't outperform the underlying assets in the index. Investors who are looking to beat the market (potentially a riskier approach) may choose to look at other products and services.

Investing in an ETF that tracks a financial services index gives you ownership in a basket of financial stocks versus a single financial company. As the old cliché goes, you do not want to put all your eggs into one basket. An ETF can guard against volatility (up to a point) if some stocks within the ETF fall.

In short, a review of the three standard approaches to EM allocation suggest global equity investors should allocate somewhere in the range of 13% to 39% to EM. Source: FactSet, MSCI, MSIM calculations.

Emerging markets can be a good investment if you're happy with a higher level of risk and accept that there will be volatility, especially considering the performance of the MSCI EM index.

Emerging Markets Can Outperform Even If a US Recession

Malcolm Dorson, a money manager at Global X Management in New York, also said emerging markets are better-positioned than major economies in the wake of the pandemic.

What is the best way to invest in emerging markets?

When basic caution is exercised, the rewards of investing in an emerging market can outweigh the risks. Despite their volatility, the most growth and the highest-returning stocks are going to be found in the fastest-growing economies.

ETFs may close due to lack of investor interest or poor returns. For investors, the easiest way to exit an ETF investment is to sell it on the open market. Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF.

Because of their wide array of holdings, ETFs provide the benefits of diversification, including lower risk and less volatility, which often makes a fund safer to own than an individual stock. An ETF's return depends on what it's invested in. An ETF's return is the weighted average of all its holdings.

Exchange-traded funds (ETFs) and index funds are similar in many ways but ETFs are considered to be more convenient to enter or exit. They can be traded more easily than index funds and traditional mutual funds, similar to how common stocks are traded on a stock exchange.