By Morgan Harting, Marco Santamaria, and Sammy Suzuki
Investors are increasingly using passive portfolios to boost exposure to emerging markets and keep volatility under control. We see better ways to reduce the risks while sourcing returns from across the developing world.
Emerging stocks and bonds have strongly outperformed this year, as return-starved investors fled the bleaker prospects on offer in developed markets. Flows are also showing signs of life. Brightening EM economic conditions, rebounding earnings growth and attractive valuations suggest that the EM equity rally has more room to run.
In developing markets, however, greater opportunity comes with greater risks. Though volatility across global stock markets has diminished since 2012, the EM equity market is nearly six percentage points more erratic than its developed counterpart (Display). It's critical to stay attentive to risks that could derail performance.
The Passive Slippery Slope
Investors manage…
