Investopedia: Emerging Market ETFs - More Growth And Less Overall Volatility

One of the most common expressions in finance and economics is that there is no such thing as a free lunch; greater return means greater risk, or at least a lot more effort spent turning over rocks in the hunt for undervalued opportunities. Strangely enough, though, this saying is not completely true. Emerging market ETFs are not necessarily a free lunch on their own, but they can have a very positive effect on a diversified portfolio. (To learn more about emerging markets, check out What Is An Emerging Market Economy?)


Growth Means Performance
Simply put, emerging markets generally outperform developed markets because the underlying economies are growing quite a bit faster. As per IMF data, the global economy grew about 5% in 2010, with developed economies growing 3% and emerging economies growing 7.3%. That spread also holds up through the worst of the past recession - emerging economies outgrew the developed economies by 3.2% in 2009.

What's more, the prospects for growth are generally better in these economies. Many of these countries have very young populations and increasingly liberalized rules regarding starting and operating a business. Not only is there a surge in new business creation, then, but the improvement in the standard of living allows more consumers to buy more and better goods, furthering the growth and potential of the domestic markets and the companies that serve them. (For more on the global economy, read Can Global Investors Profit From GDP Watching?)


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