Overview: Investing in emerging and frontier markets (Part 1 of 4)
Are you investing for additional return?
People invest to see their money grow. More specifically, people invest to see their money grow faster than it would grow in their bank accounts. The rate at which your money grows in a way depends upon your risk capacity. Equity investors with a smaller risk appetite tend to invest more in blue chips stocks like Apple (AAPL) and Microsoft (MSFT) mostly through mutual funds or exchange-traded funds (or ETFs), which ensures steady returns over the long-term. Such long-term investors prefer low-risk stable returns over high-risk super-normal returns.
In search of yield
There’s another category of investors who invest in search of higher and maximum returns. These investors are willing to take on additional risk, over and above the market risk, to invest in avenues that can multiply their money many folds within a short period of time. A few investment options available to these investors include:
High-yield bonds are also referred to as junk bonds. These bonds are issued by below investment grade companies. They carry substantial credit risk, but give higher returns. Investors usually invest in these through ETFs like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK).
Like high-yield bonds, leveraged loans are issued by sub-investment grade companies and offer higher returns along with additional risk. The PowerShares Senior Loan Portfolio ETF (BKLN) which tracks the S&P/LSTA U.S. Leveraged Loan 100 Index, is the most popular ETF falling in this category.
In emerging and frontier markets aggressive investors who wish to reap large capital gains frequently turn to the stocks of smaller companies that trade in less-developed markets. However, the types of companies that trade in these two markets are not always alike.
In this series, we’ll talk about investing in the frontier and emerging markets, the key differences between the two, the advantages and disadvantages of taking on the additional risk attached to such investments, and ways in which you could include such investments in your portfolio.
Let’s start by understanding what emerging and frontier markets are and how they’re different from one another.
Browse this series on Market Realist: