Investing in emerging markets (EM) doesn’t come without its challenges, particularly in a pandemic-ridden environment, but ETFs like the Invesco S&P Emerging Markets Low Volatility ETF (EELV) can help ease the potential volatility.
There are several reasons that EM investing can make for a challenging investment case, as outlined in books like Cracking The Emerging Makets Enigma by scholar and finance professor Andrew Karolyi. One of them is the political instability that certain countries can face.
“Many investors consider political stability to be a primary source of risk when investing,” a Wharton Magazine article noted. “Measurements of political stability might include constraints on policy change and commitments to business and real estate ownership.”
Another reason is operational efficiency when it comes to investing in markets overseas. As such, this is where a low-volatility component, like the one inherent in EELV, can help.
“Operational efficiency relates to the various transactional costs involved when trading in these markets,” the Wharton article explained. “These include explicit trading costs, such as commissions, fees and taxes, as well as implicit costs such as bid-ask spreads, market impact costs, market depth and breadth considerations; other measures of market liquidity; restrictions (such as on short selling); clearing and settlement systems; and market integrity.”
Fortunately, that could all be mitigated with EELV. The fund itself seeks to track the investment results of the S&P BMI Emerging Markets Low Volatility Index. S&P Dow Jones Indices LLC compiles, maintains, and calculates the underlying index, which is designed to measure the performance of 200 of the least volatile stocks of the S&P Emerging Plus LargeMidCap Index.
The pandemic has certainly hit EM hard this year. However, the low-volatility component is helping EELV beat out the MSCI Emerging Markets index with a 12% gain year-to-date.
EELV data by YCharts
A Growth Reward for EM Investing
So given the risks, what’s one reason to invest in EM? Growth plays a key factor, especially for investors willing to stomach the risk in order to achieve growth-fueled returns over time.
“The biggest possible reward from investing in an emerging market is high growth,” an All Business article mentioned. “Emerging market countries tend to grow much more rapidly than developed nations, sometimes experiencing double digit growth. Therefore, investments in these countries can also grow much more quickly than can investments in established markets.”
“In the past, emerging markets such as Russia and China have sometimes seen annual growth in their stock markets higher than 100 percent,” the article added.
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