Managing Emerging Markets

So you want to invest in emerging markets. Who could blame you? Just take a look at how some emerging-markets ETFs have performed lately:

• The iShares MSCI Emerging Markets Index ETF (EEM) is up more than 40% year to date as I type this, and has averaged nearly 16% over the past five years, with shares of stocks like Taiwan Semiconductor (NYSE: TSM  ) , Petroleo Brasileiro (NYSE: PBR  ) , and Israel-based Teva Pharmaceutical (Nasdaq: TEVA  ) helping lead the way.
• The iShares FTSE/Xinhua China 25 Index (FXI), invested in securities such as China Mobile (NYSE: CHL  ) , CNOOC (NYSE: CEO  ) , and Aluminum Corp. of China (NYSE: ACH  ) , has averaged nearly 15% over the past three years and was recently up more than 33% year to date.

I'm a fan and investor in emerging markets myself, so it was with interest that I recently read in Money magazine that emerging markets are an "inflating bubble" that investors might want to avoid. The magazine noted the recent outsized returns, but also warned about the risks of currency devaluation and political instability. Fair enough. It is true that few countries are as stable as the United States.

But Money offered a strange way to deal with this worrisome bubble: by investing in a mutual fund -- the American Funds New World (NEWFX), which invests in both emerging markets and also companies from the developed world that operate in emerging markets. The idea seems reasonable, as you balance some of the riskier investments with some more stable ones. But the suggested fund has a sales load of up to 5.75%! On a $10,000 investment, that would clip off $575 from the get-go.

What to do
Why opt for an expensive fund that exposes you to two types of investments for a steep fee when you can just invest in two funds that cover the same bases for a smaller fee? The Vanguard Emerging Markets Index Fund (VEIEX) not only charges no load but has also outperformed the New World fund over the past three, five, and 10 years.

In addition, you can get some emerging-market exposure from big U.S. companies. Yum! Brands (NYSE: YUM  ) , for example, is busy adding more restaurants in places such as China and India.

You may already own plenty of the big international operators, so all you might need to add is a small amount of direct exposure to emerging-market companies.

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