Asian emerging markets have been a popular destination for international investment. Not only do they offer higher potential returns, but the developing economies of China and India are seen as good growth opportunities for companies selling into those countries’ growing middle classes.
As of January 2014, Asian ETFs totaled $8.8 billion in assets under management(AUM), according to the State Street Global Advisors. Having emerged after more than three decades of market liberalization and rapid growth, the Asian economies remain one of the fastest-growing regions on Earth, accounting for over 45% of global GDP (vs 12% Western Europe).
A rising middle class has led to massive investments into infrastructure, which continue today. The United Nations projects that by 2050 there will be around 5.2 billion Asians, up from 3.3 billion in 2013, comprising 60% of the world’s population (up from 21%) at that time.
However, you’re taking on an increased amount of risk by investing your money in these markets if you choose to purchase Asian ETFs rather than individual stocks or mutual funds from that region. In this article, we’ll explore some of the factors that could make Asian ETFs less suitable than other types of investments so that you can decide whether they’re right for you.
A common reason why people invest in mutual funds is to reduce the risks associated with buying lots of individual stocks. It’s generally true in the case of Asian ETFs as well, due to these funds’ market weighting.
For example, if you buy an ETF that tracks the top 30 companies in China, your investment is effectively spread across these firms’ fortunes. If their share prices all rise by different amounts – say, one company sees its price go up 20%, another only 5%, and so on – then you will own more shares in the latter than if you had just bought that company’s stock directly instead.
However, this is only beneficial if it reduces investing in Asian markets. While market-weighted portfolios can effectively mitigate risk when they include diversified Western markets like the S&P 500, ETFs that follow Asian markets are less likely to be divided up in this manner.
For one, it’s important to remember that China technically isn’t an emerging market – its economy is the second-largest in the world. So if you invest in a Chinese ETF, your money is spread across just 30 companies at most. That could still be enough to reduce risk relative to individual stock picking, but only if those firms are themselves relatively diversified. And it might not be enough protection to justify sacrificing cost-effectiveness and increased opportunities for growth through investing in several stocks instead.
Another major issue with Asian ETFs is liquidity. Sometimes there’s not sufficient trading activity within these funds for investors to cash out their shares at any given time. It means that you might have to wait until the next time the fund issues a distribution payout before you can sell your holdings.
It isn’t necessarily a deal-breaker for ETFs in general since buying and selling shares comes with extra charges regardless of whether they’re traded on an exchange or through an intermediary like a mutual fund company. But it’s still something that could affect your decision – after all, if there’s a chance that your money won’t be accessible when you need it, then maybe you should think about investing elsewhere.
As with all investments, Asian ETFs come with some risks attached. And while these funds might provide exposure to some very exciting growth opportunities for your money, they might also limit the return you expect to make on it.
That’s why taking some time to research any investments you’re considering is essential – ETFs are no exception. And while reading an article like this one won’t tell you everything there is to know about Asian ETFs. Hopefully, you’ve at least come away with enough knowledge to help inform your own decisions about these funds.
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