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How do emerging markets stack up against developed markets in terms of returns?

Lillianna Pickavant

When it comes to evaluating the returns of emerging markets vs. developed markets, there are several key factors that need to be taken into consideration. It's not a simple matter of comparing one against the other and picking a winner.

To begin with, it's important to define what we mean by "emerging markets" and "developed markets." Generally speaking, emerging markets are economies that are still in the process of developing and industrializing, while developed markets are those that have already gone through this process and are now characterized by high levels of wealth, stable political systems, and advanced infrastructure.

With this in mind, it's important to recognize that emerging markets and developed markets have different risks and rewards. Emerging markets can be more volatile and unpredictable due to political instability, weak institutions, and other factors. However, they can also offer higher potential returns due to their faster rates of economic growth and relatively low valuations. On the other hand, developed markets tend to be more stable and predictable, but their potential for returns may be lower due to their more fully-formed economies and higher valuations.

When it comes to comparing the returns of these two types of markets, there are several metrics that are often used. One of the most commonly cited measures is the MSCI Emerging Markets Index, which tracks the performance of companies within emerging markets. Another popular comparison tool is the MSCI World Index, which tracks the performance of companies in developed markets.

Using these metrics, we can see that emerging markets have historically offered higher returns than developed markets. Over the past decade, the MSCI Emerging Markets Index has returned an average of 4.88%, while the MSCI World Index has returned an average of 3.3% (as of September 2021). However, it's important to keep in mind that past performance does not guarantee future results. The relative performance of these markets can shift based on a variety of factors, such as changes in interest rates, geopolitical events, and shifts in investor sentiment.

Ultimately, the decision of whether to invest in emerging markets or developed markets depends on a variety of factors, including an investor's risk tolerance, investment goals, and time horizon. Emerging markets can offer higher potential returns, but they also come with higher risks. Investors should carefully evaluate their options and consult with a financial advisor before making any investment decisions.