Ask Matt: Are emerging markets stocks a bad idea?

Q: Are emerging markets stocks a bad idea?

A: Shares of companies based in less-developed nations are getting clobbered. It might be tempting to write them off. That would be a mistake.

Emerging markets stocks are certainly suffering. The Vanguard Emerging Markets exchange-traded fund (VWO), a measure of stocks from countries like China, India and Brazil, has lost about a quarter of its value over the past year. Over the past three years they’ve done even worse. e.

But don’t let recent performance convince you these stocks are a bad investment. Emerging markets stocks are one of the most volatile major asset classes you can invest in, with risk that’s higher than that of the U.S. market, says Index Fund Advisors. But emerging markets stocks are also one of the few asset classes that generate enough excess return to justify the extra risk. Another added bonus: Emerging market stocks often zig when U.S. markets zag. That’s bad now, but could be welcome once U.S. stocks sputter. Just because emerging markets have a bad run doesn’t mean that will continue. Emerging markets stocks dropped 29% in 2000, making them the worst asset class, says Index Fund Advisors. But just three years later, the group turned into one of the best with 60% gain in 2003, 30% gain in 2004 and 30% in 2005.

Paste BN markets reporter Matt Krantz answers a different reader question every weekday. To submit a question, e-mail Matt at mkrantz@usatoday.com or on Twitter @mattkrantz.