Emerging Markets: What You Need to Know Before Investing | American Funds

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Emerging Markets: What You Need to Know Before Investing

Stocks and bonds from developing countries have the potential to generate high returns, but they can be extremely volatile and have a greater risk of loss.

Emerging markets — also known as developing markets — differ from those in what is commonly referred to as the developed world. They are largely located in Eastern Europe, parts of Asia, South America, Africa and the Middle East. They are often marked by rapid industrialization on the one hand, and by more volatile economies and securities markets on the other. Some of the largest emerging markets are Brazil, Russia, India and China.

Investors can gain exposure to emerging markets in a number of ways — by investing in stocks issued by companies legally headquartered in emerging markets and by investing in bonds issued by those same companies or by the governments of those developing countries. They can also gain exposure to emerging markets by investing in companies whose businesses either have operations or generate revenues there. Many mutual funds offer exposure to emerging markets, either in part or in full, depending on the funds’ objectives.

Potential Benefits

  • Emerging markets stocks have the potential for high growth over time, and bonds issued by companies and governments in emerging markets often offer investors high yields, reflecting the risks associated with those economies.

Potential Risks

  • Emerging markets stocks and bonds can be highly volatile; the value of these securities can vary greatly on a day-to-day basis.
  • Government regulation of companies within emerging markets may mean lower standards of business, and the economies of emerging markets are generally more susceptible to global economic shifts.
  • Governments in emerging markets have defaulted on bond issues in the past.
  • Differing securities regulations and accounting standards can increase the risks associated with owning securities from issuers in emerging markets.

Reasons to Consider

  • Investors may wish to consider investing in emerging markets equities or bonds in order to add growth potential or high-income potential to their portfolio, but should consider their risk tolerance carefully before doing so.
  • Emerging markets securities may not be suitable for more conservative investors with a short time horizon or seeking to protect their assets or minimize volatility.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. 

Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries.