The Benefits and Risks of Investing in Emerging Markets

The United States is the largest economy in the world by far, accounting  for more Emerging Markets Investment than a quarter of the world’s gross domestic product (GDP) in 2022. Yet we make up less than 5% of the global population.

Most of humanity doesn’t enjoy the same standard of living that we do — at least, not yet. Developing countries are full of people working hard to offer their children the kind of life we take for granted in America. And every year, more of them succeed.

In investing parlance, these developing countries are called emerging markets. Investing in emerging markets isn’t just good for the conscience — it can also be a potentially profitable way to diversify your investment portfolio.

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What are emerging markets?

Emerging markets are countries with fast-growing economies. They’re also called developing economies or developing countries. Emerging markets are often contrasted with so-called “established markets” or “advanced economies” like the U.S., which tend to be wealthier and more stable, but slower-growing.

Five countries that make up the “BRICS” acronym — Brazil, Russia, India, China and South Africa — are some of the most prominent examples of emerging markets, and they’re good examples of why emerging markets are of interest to investors.

The U.S. economy grew about 58% between 2012 and 2022, the latest year for which complete international data is available

The slowest-growing BRICS economy, South Africa, grew about 86% over that decade . The other four all had growth rates above 100%.

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• Country
• GDP growth, 2012-2022
• United States
• 58.39%
• Brazil
• 109.35%
• Russia
• 125.32%
• India
• 175.64%
• China
• 123.69%
• South Africa
• 85.86%

Source: Federal Reserve Bank of St. Louis. Data is current as of Apr. 5, 2024.

Index provider MSCI classifies 24 countries as emerging markets

. They’re listed below:

• Brazil
• Chile
• China
• Colombia
• Czechia
• Egypt
• Greece
• Hungary
• India
• Indonesia
• Kuwait
• Malaysia
• Mexico
• Peru
• Philippines
• Poland
• Qatar
• Saudi Arabia
• South Africa
• South Korea
• Taiwan
• Thailand
• Turkey
• United Arab Emirates

You may notice that certain notable emerging markets, such as Russia, are missing from the list above.

There is no universal standard for noting which countries are emerging markets, and indexers like Emerging Markets Investment MSCI often have geopolitical concerns to work around. Russia, for example, is an emerging market by most definitions. But it’s largely unavailable to Western investors for reasons related to the Russia-Ukraine war, so MSCI stopped tracking it in 2022.

Should I invest in emerging markets?

Investing in emerging markets might sound advanced or out-of-reach for novice investors, but there’s a strong argument for diversifying outside of the U.S. Even simple portfolios, such as those that contain only two or three funds, often include some exposure to international stocks. After all, a stock market crash in the U.S. might not hit international markets as hard.

In theory, faster GDP growth in emerging markets should also translate into faster stock market growth, but this doesn’t always work out in practice. Many of the ETFs listed above have underperformed the S&P 500 over the last five years, for a variety of reasons.

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Some emerging markets, such as Kuwait and Saudi Arabia, have energy-dominated economies that tend Emerging Markets Investment to boom when oil prices are high, and decline when they’re low. Others, such as Poland and Turkey, have unique security risks because they border active war zones.

There’s a common thread between these underperformances: Emerging markets tend to be less stable than established markets. They may be faster-growing, but that fast growth is more vulnerable to interruptions, like shifts in global resource markets or armed conflict.

One way to manage this kind of risk is by investing in several emerging markets at once, through a diversified emerging markets ETF, rather than a country-specific one.

» Interested in ETFs? Check out the best ETFs by one-year performance.

9 top-performing emerging market ETFs as of August 2024

Below is a list of the nine best-performing emerging markets ETFs listed by Finviz, ranked by one-year return.

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• Ticker
• Company
• Performance (Year)
• GLIN
• VanEck India Growth Leaders ETF
• 41.39%
• INCO
• Columbia India Consumer ETF
• 39.90%
• EPI
• WisdomTree India Earnings Fund
• 36.88%
• DGIN
• VanEck Digital India ETF
• 36.44%
• ARGT
• Global X MSCI Argentina ETF
• 34.46%
• NFTY
• First Trust India Nifty 50 Equal Weight ETF
• 33.59%
• SMIN
• iShares MSCI India Small-Cap ETF
• 32.77%
• FLIN
• Franklin FTSE India ETF
• 30.91%
• INDA
• iShares MSCI India ETF
• 30.27%

Source: Finviz. Data is current as of Sept. 3, 2024, and is intended for informational purposes only.

Of course, it’s worth researching an ETF before you buy it, just as you would research stocks. Different Emerging Markets Investment emerging markets ETFs may have different holdings — and if you’re looking for exposure to a specific company in an emerging market, you may want to consider investing in it directly.

» More on index funds: Check out some of the best index funds in terms of long-term performance.

Investing in emerging market stocks

There are a few emerging market stocks that are directly listed on U.S. exchanges — largely bank stocks. For example, HDFC Bank, India’s largest bank, trades on the New York Stock Exchange under the ticker “HDB.”

Some others are available via over-the-counter (OTC) markets — although it’s worth checking an OTC emerging market stock’s trading volume on a website like Yahoo Finance or Google before buying it. Buying a low-volume OTC stock at a good price can be tricky.

Even large conglomerates like South Korea’s Hyundai (HYMTF) are largely overlooked by U.S. investors because they trade OTC. They may only change price a few times per trading day due to a lack of buyers and sellers. That can result in buy or sell orders going through at suboptimal prices, or not going through at all. Limit orders can somewhat mitigate this risk.

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A third way to invest in individual emerging market stocks is to open an account with a Emerging Markets Investment broker that allows Americans to trade directly on foreign stock exchanges. However, only a few brokers offer this feature, and those that do may have special requirements for would-be foreign stock traders.

It’s also worth considering that you may be subject to the investment taxes and laws of the host country while investing directly in its stock market.

Neither the author nor editor owned positions in the aforementioned investments at the time of publication.

Frequently asked questions

Are emerging markets the poorest countries?

Emerging markets are often poorer than advanced economies, but on a global scale, they’re upper-middle-income countries, for the most part.

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In economics terminology, countries with very low GDPs, such as Afghanistan or the Democratic Republic of the Congo, are referred to as “least-developed countries,” or LDCs.

Although LDCs may have the potential for rapid economic growth in the future, many are largely inaccessible (or extremely hazardous) to international investors today, due to some combination of lack of infrastructure, active conflict, or lack of a functioning legal or banking system.

Is investing in emerging markets the same as forex?

No — investing in emerging markets means investing in stocks from other countries, while forex involves trading the currencies of other countries.

Forex is a complicated and risky market that may not be appropriate for novice investors. But if you feel you’re capable of trying your hand at it, check out our list of the best forex brokers

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The Best Personal Finance Apps for 2024

Meta Description Find the best budget apps for 2024. Discover free Personal Finance Apps available on the app store and google play with high store ratings. Learn about the features of these apps and how they can help manage your personal finances.

Understanding Budget Apps

Budget apps are cool tools that help you manage your money. They connect with your financial accounts, track what you’re spending, and show you where your money is going. Some apps even do more than that. They help you plan your finances and make smart decisions about your money

Top Choices for Budget Apps

There are many budget apps out there, but we’ve picked out the best ones for you. We didn’t include our own app in this list because we want to give you an unbiased view. These apps have great features and lots of people love them. Let’s take a closer look at some of them.

 YNAB The Hands-On Budgeting App

YNAB is an app that helps you plan your money ahead of time. It uses a method called zero-based budgeting. This means you make a plan for every dollar you earn. As soon as you get paid, you tell YNAB how much you want to spend, save, and pay off debt. It’s a very hands-on app, but it has lots of resources to help you learn how to budget and use the app. The downside is that you need to be committed to keep up with it and it’s a bit pricey.

Benefits

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– Connects with your checking and savings accounts, credit cards, and loans.

– Available on mobile, desktop, iPad, Apple Watch, and Alexa.

– Store rating 4.8 on iOS app store and 4.7 on Google Play.

 Goodbudget The Envelope Budgeting App

Goodbudget is another great app that helps you plan your finances. It uses the envelope budgeting system, where you set aside money for different spending categories. It doesn’t connect to your bank accounts, so you need to add all the information manually. This could be a bit of work, but it can also help you be more aware of your spending.

Benefits

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– Available on your phone and the web.

– Store rating 4.6 on iOS app store and 4.0 on Google Play.

 EveryDollar The Simple Budgeting App

EveryDollar is a simple and easy-to-use app. It uses a zero-based budgeting method, but it’s simpler than YNAB. The free version requires you to enter all the information manually, while the premium version allows you to connect your bank account.

Benefits

– Allows you to connect your saving and investing accounts with the premium version.

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– Store rating 3.8 on iOS app store and 3.3 on Google Play.

 Empower Personal Dashboard The Wealth and Spending Tracker

Empower Personal Dashboard is an app that helps you track your wealth and spending. It’s primarily an investment tool, but it also has features that can help you track your spending.

Benefits

– Connects and monitors checking, savings, and credit card accounts, as well as IRAs, 401(k)s, mortgages, and loans.

– Store rating 4.8 on iOS app store and 4.3 on Google Play.

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 PocketGuard The Simplified Budgeting App

PocketGuard simplifies budgeting. It connects your bank accounts, credit cards, loans, and investments and  Personal Finance Apps shows you how much you have left to spend after setting aside money for necessities, bills, and goals.

Benefits

– Tracks your net worth.

– Store rating 4.6 on iOS app store and 4.1 on Google Play.

 Honeydue The Budgeting App for Partners

Honeydue is an app that helps you and your partner manage your finances together. You can both see your financial information in one place and set up monthly limits for different spending categories.

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Benefits

– Allows you to sync bank accounts, credit cards, loans, and investments.

– Store rating 4.5 on iOS app store and 3.8 on Google Play.

 How We Chose the Best Budget Apps

To create this list, we looked for apps that let users sync financial accounts, plan their finances, see their spending patterns, track bills, and share financial information with partners. We also checked the apps’ ratings on the iOS App Store and Google Play and read reviews from real users. We only included apps that had high ratings and lots of reviews. These ratings were last updated on Aug. 12, 2024.

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How Digital Transformation is Shaping Banking Services

Digitalization has become an imperative for banks. As we have seen in Digital Transformation Banking our review of our case examples, a successful digital transformation can lead to better business outcomes, including higher balances for current account savings accounts, lower cost-to-income ratios, increased customer acquisition and retention rates, and faster time to market.

However, only 30 percent of banks that have undergone a digital transformation report successfully implementing their digital strategy, and the majority fall short of their stated objectives.1 This low success rate holds true for most industries and has remained constant for many years despite significant technological and organizational innovations, though technology-focused companies typically fare better.

In this post, we discuss why banks often fail to execute their digital transformations—and what they can do to tilt the odds in their favor.

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Common traps to avoid

Banks often argue that if they had a sufficient technology budget, their transformations would be successful. But we have seen several banks in recent years allocate significant resources to their digital transformations and still struggle to execute them.

The nature of the banking industry poses specific challenges. For one, banks have invested in technology for decades and thus typically have developed a significant amount of technical debt, along with a siloed and complex IT architecture. Separation between the business and IT makes it more challenging to implement the necessary cultural shifts. Finally, banks also face an aging workforce, particularly compared with purely digital fintechs.

We have identified a common set of execution challenges that threaten to derail banks’ digital transformations, and follow with a set of recommendations for how to overcome them.

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Underestimating complexity and cost

A digital strategy begins with a business case, and every business case is calculated with a specific time to impact. Once transformation initiatives extend beyond the expected project duration, the increase in cost can often overtake the projected value of the original transformation or lead to its cancellation.

More than half of digital banking transformations exceed their initial timeline and budget—or fail.2 Leaders often underestimate the complexities of executing a digital transformation, which typically involve complicated interfaces, data management, and interdependencies across initiatives. Common mistakes include not fully involving all stakeholders in the development of the strategy and blueprint, miscalculating the extent to which existing business processes need to change, and not sufficiently implementing the magnitude of changes required to truly reap the benefits of the transformation. These challenges are especially relevant for banks, given that the business side is often removed from technology developments, business processes are assumed to be fixed, and the IT architecture landscape is particularly complex.

Initial budgets often fail to account for these factors, which can lead to a delay in the impact and the impression that costs have spiraled “out of control” when, in reality, the program was never feasible in the way it was originally envisioned. According to our research, 70 percent of digital transformations exceed their original budgets, and 7 percent end up costing more than double the initial projection.3

Underestimating technical debt

The need to address technical debt—by cleaning up legacy technology stacks, unused applications, and excessive infrastructure—is often missing from initial transformation budgets or perceived to be less important than other transformation initiatives. It is, however, a critical prerequisite to executing a digital transformation at pace, even if the work does not generate an immediate financial gain. Therefore, banks need to assess and prioritize the work of addressing technical debt from the beginning of a digital transformation.

In general, because banks have many legacy IT applications, they have higher technical debt compared with other industries, making it harder for them to create the platform they need for the digital future (exhibit).

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Challenges in measuring impact

As the saying goes, what gets measured gets done. Yet few organizations effectively measure, and therefore deliver, top- and bottom-line value over the course of a digital transformation. Banking leaders must identify critical impact metrics, baseline the current state, and track the impact during and after the transformation. Only then can they achieve the full financial benefits of the transformation effort.

In our experience, banks struggle to accurately quantify and track the impact of their digital strategy Digital Transformation Banking and to establish a clear link between specific initiatives and their revenue and profit growth. Too often, leaders do not capture the full value of their digital strategy because they lack well-defined success parameters, inadequately engage the full set of end users (customers, employees, and other stakeholders), and fail to consider the potential adverse effects on customer satisfaction.

Slow pace of change

Large banks typically lag their competitors on innovation speed and productivity. A reliance on traditional operating models, coupled Digital Transformation Banking with limited adoption of agile ways of working, can hinder the success of their digital transformation. A McKinsey banking survey conducted in 2021 found that while fintechs and neobanks release new product features every two to four weeks on average, traditional banks have product rollout cycles of four to six months. Our research also shows that large banks are 40 percent less productive than digital natives.4 This slow pace of change can cause banks to give up on their digital transformations rather than attempt to overcome the underlying cultural barriers that inhibit the speed of the transformation.

Missing talent

While traditional banks know how to hire banking talent, the same is not always true for tech talent. Typically, banks are not the preferred destination for tech talent—but talent is a key prerequisite for making the digital transformation work. Our research suggests that at least 50 percent of employees involved in the transformation should be in-house—and that risks increase significantly when 70 percent or more of the employees involved in the transformation are outsourced.5 To ensure the success of their digital programs, traditional banks need to refine their employee value proposition to attract more tech talent—for example, by providing incentives and work environments that rival those of fintechs.

Organizational silos

A successful digital transformation relies on close collaboration and coordination across the organization. However, many banks continue to operate in traditional functional or business silos, which leads to conflicting or misaligned priorities, lack of clarity, and a fragmented approach to execution. In our experience, banks often have duplicate systems and solutions, such as customer-relationship-management (CRM) platforms and small and medium-size enterprises (SME) channels, across business lines. Similarly, banks with strong country-level operating models typically overlook efficiency gains that could result from reusing existing functionalities across geographies.

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A better path forward

Meeting these challenges requires banking leaders to take a holistic approach across the business, technology landscape, and operating model. However, our experience shows that going all in on a digital transformation can help banks avoid some of the most common pitfalls and yield significant benefits. For example, one major European bank redesigned its operating model and reset roles and responsibilities to embed agile practices throughout the organization. At the same time, it revamped its core banking system, including a complete overhaul of its integration architecture and data architecture. These measures generated cost savings of 30 percent and enhanced the bank’s capacity to deliver value well into the future.

Imperatives for success

Banks can address these challenges by taking several actions, not all of which are intuitive:

• Reduce complexity (which may require simplifying interfaces and addressing dependencies) and avoid surprises Digital Transformation Banking by budgeting the necessary time and resources up front (for example, by using micro front ends and reusable APIs and by implementing DevSecOps as a standard across digital initiatives).
• Estimate the technical debt and ensure that the initial budget includes the cost to remove it; otherwise, the debt will lead to delays and cost increases.
• Overinvest in the cultural shift, even if it might not be directly related to technology.
• Attract tech talent and do not try to outsource the transformation.
• Break down organizational silos and design a holistic transformation road map (not just by business area).

To measure the change, agile practices and processes such as quarterly business reviews should be in place to allow for effective prioritization and value tracking. Traditional oversight should be replaced by cross-functional collaboration, cross-silo performance management, and a new concept of joint accountability across the business and IT. Along the way, leaders can highlight “lighthouse” projects to inspire employees and build momentum.

A large-scale digital transformation is not easy, and it is not surprising that most banks struggle to achieve their business objectives on time and within budget. However, banking leaders can take steps to avoid the most common mistakes by defining clear goals and metrics that reflect not only the business change but also the cultural and technical changes required. By doing so, banks can increase their chances for success and reap the full potential of their digital transformations.

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