Investing Assets & Markets Mutual Funds Emerging Market Funds vs. International Stock Funds Invest In One, Both, or Neither? By Kent Thune Kent Thune Twitter Kent Thune has spent more than two decades in the financial services industry and owns Atlantic Capital Investments, an investment advisory firm, in Hilton Head Island, South Carolina. He's written hundreds of articles for a range of outlets, including The Balance, Kiplinger, Marketwatch, and The Motley Fool. learn about our editorial policies Updated on March 31, 2022 Reviewed by Anthony Battle Reviewed by Anthony Battle Anthony Battle is a CERTIFIED FINANCIAL PLANNER™ professional. He earned the Chartered Financial Consultant® designation for advanced financial planning, the Chartered Life Underwriter® designation for advanced insurance specialization, the Accredited Financial Counselor® for Financial Counseling and both the Retirement Income Certified Professional®, and Certified Retirement Counselor designations for advance retirement planning. learn about our financial review board Fact checked by Ariana Chávez Fact checked by Ariana Chávez Ariana Chávez has over a decade of professional experience in research, editing, and writing. She has spent time working in academia and digital publishing, specifically with content related to U.S. socioeconomic history and personal finance among other topics. She leverages this background as a fact checker for The Balance to ensure that facts cited in articles are accurate and appropriately sourced. learn about our editorial policies In This Article View All In This Article What Are Emerging Market Stocks? What Are International Stocks? Emerging Markets vs. International Stock Emerging Markets or Foreign Stock Funds Photo: Skarie20 / Getty Images When you're looking through global investments, it can be difficult to choose between an international stock mutual fund or an emerging market fund. It helps to understand what each one is and their differences so that you can decide whether to use them in your portfolio. Key Takeaways Emerging markets are countries with quickly growing economies, such as Brazil, China, India, and Mexico.International stock funds choose the best-performing stocks from a range of developed economies, though many of these are also available domestically.Short-term returns are often higher from emerging markets. International funds can be more stable in the long term.Investing globally provides diversification. Still, conservative investors may want to limit international investments to 20% of their portfolios. What Are Emerging Market Stocks? Emerging markets are countries with rapidly growing economies that are generally "less developed" than larger or more established nations, such as the United States and Western European countries. Some of the largest countries that are considered emerging markets (by western standards) are China, India, Russia, Brazil, and Mexico. In general, the market risk is higher for emerging markets than that of more developed countries. This risk is usually due to political instabilities, civil unrest, questionable accounting standards, or unstable currencies. However, the higher relative risk generally provides higher potential returns. What Are International Stocks? International stock funds purchase several shares of stocks across developed countries. These funds place the stocks into a collection of funds. Many international funds follow indexes created from the best-performing stocks in broad geographic areas. For example, the MSCI EAFE Index tracks 874 stocks from many countries. Note Developed countries have more robust and mature economies. Therefore, there is less risk when investing in international stocks, compared to emerging market stocks. Investors may find that many international stock funds invest in the same companies that domestic funds invest in. Some of the top holdings for MSCI EAFE are from Nestle, Novartis, Toyota, Unilever, and Sony. Investors who access foreign investments through international funds reduce foreign investing risks through diversity, indexing, and familiarity. Emerging Markets vs. International Stocks Most investors who are deciding between buying emerging market funds or some other international stock funds are looking for higher returns. Due to the higher relative risk, it's easy to believe that emerging market funds have better returns than international stock funds. This is generally true in the short term, but investors can also see low returns. In the long run, stock funds that don't concentrate on emerging markets tend to generate better returns based on economic stabilizing factors such as monetary policies from central banks and legislation enacted by the government to help consumers and businesses. Note International stocks can have emerging market stocks mixed within them. The opposite is also true. It helps to study each fund's holdings to understand what you're buying. It's important to remember that the returns of international stock funds and emerging market funds also depend on how they are managed. Fund managers of both types generally try to match an index. One type might perform better than the other over different periods, but the risks will generally remain the same. For instance, the Vanguard FTSE Emerging Markets Index Fund ETF Shares (VWO) price is higher than the Vanguard Total International Stock Index Fund Admiral Shares (VTIAX). Holdings at the top of both types of funds include Tencent, Alibaba, and Taiwan Semiconductor Manufacturing. The international fund has fewer holdings in any of the companies than the emerging market, making it more diversified. Diversification, along with lower prices and steady growth, makes the global fund less risky and higher-returning in the long run. Still, your returns are slightly better with the emerging market fund in the short run. You might get better returns in fewer years with the emerging market funds, but you spend more and take on more risk. Note Neither investment is "better" than the other. Which is better for your portfolio depends on your risk tolerance, investment strategy, and how much capital you have to dedicate to investing. Invest in One, Both, or Neither? Whether it is emerging markets or foreign stock, any international or emerging stock fund can be an intelligent part of a diversified portfolio of funds. Relatively more conservative investors may wish to limit their international exposure to 20% of total stock holdings (with 75% and 25% to developed and emerging markets, respectively). However, investors with a higher tolerance for risk may look to expand their international exposure toward the global footprint of 45% international and 55% U.S. Keep in mind that many foreign stocks invest in emerging market countries. Therefore, one good foreign stock fund may already have sufficient exposure to emerging markets. Your strategy and comfort level dictate how you organize your global investments. It is possible to invest in one, both, or neither, depending on your preferences and portfolio. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. MSCI. "MSCI EAFE Index (USD)." Vanguard. "Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)." Vanguard. "Vanguard FTSE Emerging Markets ETF (VWO)."