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Fund Spy: Morningstar Medalist Edition

3 Choices for Those Expecting an Emerging-Markets Rebound

Innovative emerging-markets funds may catch the eye, but the traditional type has the edge for most investors.

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Investors who believe that the sell-off in the developing world is a buying opportunity will find that they have an abundance of options. Indeed, as we wrote in our recent research paper, “The Growing Complexity of the Emerging-Markets Fund," there now are more than 300 funds in the diversified emerging-markets Morningstar Category (open-end and exchange-traded funds combined). A daunting task faces investors looking over this group. The emerging-markets equity-fund landscape now includes four separate varieties besides the traditional type of portfolio: geographically flexible offerings, small-/mid-cap funds, multiasset offerings, and frontier-markets funds.  

  • Traditional funds focus on large-cap stocks and favor the bigger emerging markets. These funds used to be the only choice for investors, and they still compose approximately three fourths of the category. 
  • Geographically flexible funds invest not only in typical emerging-markets firms, but also invest significant chunks of their assets in companies that have extensive business in the developing world, but are headquartered in the United States or other developed markets. The first of these funds was launched in 1999, and there now are more than 20 such offerings.   
  • Small-/mid-cap funds focus on companies beyond the big, widely owned names. There are approximately two dozen of these funds at present, and all but one of them has opened in the past decade. Multiasset funds divide their assets between emerging-markets stocks and emerging-markets bonds (and in some cases currencies and more). There now are nine such funds, and all of them are less than four years old. 
  • Frontier-markets funds target stocks in countries that rank below emerging markets in terms of stock-market access and other factors, such as Colombia, Kenya, Kuwait, Nigeria, and Pakistan. The first of these funds opened in 2008, and there are 15 such funds currently.

William Samuel Rocco does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.