4 exotic investments for diversification

Emerging markets
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Emerging market stocks and bonds have been the top performers so far this year. The MSCI Emerging (stock) Markets Index jumped 48 percent through Oct. 30 in local currency terms (61 percent in dollar terms). And the J.P. Morgan EMBI Global index of emerging market bonds is up 26 percent in dollar terms.

The easiest way to participate in emerging markets is through mutual funds and exchange-traded funds, or ETFs. Using funds eliminates the need for you to research individual securities, which can be quite difficult for emerging markets.

The benefit of ETFs is that they trade throughout the day, as opposed to once a day for open-end mutual funds. In addition, because they are based on market indexes and thus don't trade actively, ETFs generally have lower fees than mutual funds. Just make sure your ETFs have enough trading volume to avoid excessive volatility.

Novice investors would do well to start with a fund that invests in multiple countries to avoid putting all your eggs in one basket.

A key issue for any foreign stock or bond fund is currency hedging. If the fund hedges its currency risk, your return should be similar whether the dollar rises or falls. If the fund doesn't hedge, your return will benefit when the dollar falls and suffer when it rises.




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