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Emerging markets have long been seen as sources of cheap labor. However, history tells us that these markets are actually hotbeds of business innovation. Just look at Japan and how its auto business came to rival (and surpass) our own. If history repeats itself, then investors can potentially find a lot of upside in emerging market ETFs.

According to a special report from the Economist, in the mid to late 1900s, Japan reinvented the automobile manufacturing business by introducing a system now referred to as “lean manufacturing.” The system allowed Japanese manufacturers to create cars more cheaply, more quickly and with better reliability compared to their American counterparts. The rest, as they say, is history.

We can see the same types of developments coming out of emerging markets today.

  • These markets are reinventing systems of production and distribution to bring us $3,000 cars, $300 computers and $30 cell phones. Already, emerging markets are ahead of developed countries in areas such as mobile finance and online games.
  • Not only are emerging markets innovating, but they are also doing so on a global level. There are 21,500 multinational companies based in emerging markets, according the United Nations World Investment Report.
  • The world’s biggest multinationals are ramping up investment in emerging market brainpower, further solidifying the claim that innovation is occurring within emerging markets. For example, Cisco (NASDAQ:CSCO) is spending $1 billion on a second global headquarters in Bangalore.
  • Population growth within emerging markets will continue to outpace growth in the developed world, providing a growing consumer market and workforce.
  • Economic optimism in the top emerging markets of China, India, and Brazil outpaces optimism in the United States, France, and Japan by two-fold.

There is always risk involved with emerging markets in the form of political turmoil, pirating, poverty, or underdeveloped infrastructure, to name a few. But the potential is definitely there, and investors can take a look at the following funds to diversify into the emerging market sector. Have a trend following strategy in place to help manage those risks and protect yourself.

  • iShares MSCI Emerging Markets Index (NYSEARCA:EEM)


  • Vanguard Emerging Markets Stock ETF (NYSEARCA:VWO)


  • EGS DJ Emerging Mkts Titans Composite (EEG)


  • Ultra MSCI Emerging Mkts ProShares (NYSEARCA:EET)


  • SPDR S&P Emerging Markets (NYSEARCA:GMM)

Sumin Kim contributed to this article.

Disclosure: None

Source: Five Key Emerging Market ETFs