Emerging markets have been a center of growth over the past 20 years. Economic prospects have improved dramatically in many areas of the world, especially in key countries like China, India, and Brazil. Long-term investors have been rewarded for making investments in emerging markets, as returns have often been far stronger than what developed markets have produced over the same period. Yet investors in emerging markets face different risks than those who focus on developed economies are used to seeing, and choosing the right stocks and sectors requires understanding the different environments in which companies operate across the globe. Among the ways you can invest in emerging markets are the following:

  • Investing directly on emerging market stock exchanges
  • Investing in emerging market stocks that list on U.S. stock exchanges
  • Investing in exchange-traded funds that own emerging market stocks
  • Investing in U.S. and other developed-economy stocks that do extensive business in emerging markets

We'll look at each of these methods of investing below.

Various emerging market currencies.

Image source: Getty Images.

Investing directly in emerging markets

Direct investment in emerging stock markets can be tougher than accessing developed economy stock markets. Many brokers don't allow direct investment on foreign stock exchanges. Among those that do, you'll typically find a clear focus on developed markets, with emerging market choices often limited to Chinese companies that list on the Hong Kong Stock Exchange, Mexican stocks, and companies in India.

As emerging markets evolve, you can expect greater opportunities for direct investment in the future. For now, though, the limits of direct emerging market investing make alternatives more attractive.

Investing in emerging market stocks that list on U.S. stock exchanges

You can find hundreds of emerging market companies that trade on U.S. stock markets like the New York Stock Exchange or the Nasdaq Stock Market. The most successful companies in major emerging markets typically make an effort to obtain a U.S. listing, both to improve liquidity and access to capital and as a symbol of their prestige and importance.

The advantage of investing solely in U.S.-listed emerging market stocks is that to get listed, companies have to provide financial disclosures under Securities and Exchange Commission rules, dramatically increasing their transparency. Companies that list also tend to be among the better-established businesses in their respective markets. The corresponding downside is that you won't always have access to the fastest-growing small companies in emerging markets if you only look at U.S.-listed stocks, so the reduction in risk comes at the cost of reduced opportunity for ground-floor investment.

Investing in emerging market ETFs

There are a host of exchange-traded funds that focus on emerging markets. Some ETFs offer exposure to the entire emerging market universe, including two of the most popular emerging market ETFs: Vanguard FTSE Emerging Markets (NYSEMKT:VWO) and iShares MSCI Emerging Markets (NYSEMKT:EEM). Other ETFs drill down on specific countries or other subgroups of emerging market stocks.

Different ETFs have varying philosophies on how to invest in emerging markets. Before you choose an emerging market ETF, you need to understand which countries the fund managers consider as emerging markets, how the fund picks its individual stock holdings, and what the fees are that the managers charge for the fund. In particular, watch out for high concentrations in a small number of stocks, because many emerging market ETFs have market-capitalization weighting methodologies that can result in the biggest companies making up a huge fraction of the fund's overall assets.

Investing in U.S. stocks that do a lot of business in emerging markets

If you're uncomfortable investing in emerging market stocks, another way to get exposure to the growth in emerging markets is through domestic companies that do business there. Many U.S. giants in the consumer goods industry have found new markets for their products in emerging economies, and at times when economic growth has been slow in the developed economic world, emerging markets have been an important and sometimes exclusive source of overall gains in sales.

Among the most internationally focused U.S. companies are Las Vegas Sands (NYSE:LVS) and Philip Morris International (NYSE:PM). Even though it's known well in the U.S. for its Venetian and Palazzo casino resorts, Las Vegas Sands has an even more impressive presence in the Asian gaming capital of Macau. Sands gets the majority of its revenue and profit from Macau, and the stock has largely tracked the fortunes of the Portuguese colony turned Chinese protectorate rather than its namesake Las Vegas gaming market. For Philip Morris International, cigarette sales come from around the world. But key emerging areas like Eastern Europe, Latin America, and several countries in the Asia-Pacific region contribute importantly to the tobacco giant's success, making up substantial portions of revenue and profit.

Investing in emerging markets has enhanced long-term returns for investors, and the diversification you can get by adding emerging market exposure to your portfolio can be quite valuable. Whether you buy individual stocks or funds, emerging markets can help boost your performance and make it easier to get you to your financial goals.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.