There is so much going around in and about emerging market economies. Some investors believe they are too risky, and others see the potential massive returns that abound. Interestingly, both sides have valid arguments.
This article offers some balance by exposing you to the world of emerging market ETFs. You also get a few recommendations of the best emerging market ETFs to focus on when you join the train.
Key Takeaways
- Countries that are still trying to find their feet in the global economy are classified as emerging economies.
- Historical performance indicates emerging markets outperformed international developed markets, despite being riskier and more volatile.
- Emerging market ETFs provide investors with a safer avenue to expose their portfolios to these high-growth economies.
- The best emerging market ETFs are EMB, SPEM, FNDE, VWO, XSOE, IEMG, and SCHE.
- Assess these options based on historical performance, dividend yield, dividend growth, assets under management, and cost.
What are Emerging Market ETFs?
We cannot understand emerging market ETFs without talking about emerging market is. The former does not exist without the latter. When a country has a consistent and considerable gross domestic product (GDP) growth, a rise in the size of its middle class, a huge contribution to global production rates, and a potential for fast growth and investment, such a country is classified as an emerging market.
Compared to developed markets characterized by developed countries, emerging markets comprise countries that are still trying to find their feet in the global economy. Popular emerging market economies include Brazil, Russia, India, and China (BRIC), and all four countries are jointly responsible for 30% of global production. Others are South Africa, Egypt, Peru, Colombia, Mexico, and South Korea (MSCI, 2020).
Therefore, emerging market ETFs focus on assets in the emerging market economies. The pooled funds from millions of investors are put into stocks of companies based in these countries. Besides stocks, the best emerging market ETFs also invest in debt securities or bonds issued by these countries’ governments or their corporations and agencies.
Why invest in Emerging Markets?
One of the best things that can happen to any investor is to ‘be early.’ Emerging markets are still in their growing phases, so they offer potentially exciting opportunities and even higher gains for early investors. Let’s drive home this point with some numbers.
Most emerging markets comprise about 10% of the global stock market and 25% of the international stock market (non-U.S. stock). This composition has outperformed both the developed markets and the U.S. stock market over the years. Historical performance has also shown that emerging markets offer higher diversification benefits. And that is because of their lower correlation to the U.S. stock market than the developed international markets.
While we cannot deny the risks and high volatility associated with emerging markets, emerging market exchange-traded funds offer investors a safer avenue to expose their portfolios in these high-growth economies. But that’s not all.
Emerging market ETFs also ensure diversification by adopting an allocation strategy that prioritizes these upcoming markets. And the fact that you can find most of these emerging market ETFs on Nasdaq, New York Stock Exchange, and other major U.S. exchanges means they are liquid. As a result, you will have no problems buying or selling them.
7 Best Emerging Market ETFs
Emerging markets are synonymous with options. Finding the best fit out of the myriad of options will take you so much time and effort. But not to worry, I have researched and compiled a list of the best emerging market ETFs you should not miss.
1. SPDR Portfolio Emerging Markets ETF (SPEM)
The first emerging-market ETF I will discuss is the SDPR Portfolio Emerging Market ETF, tracking the S&P Emerging BMI Index. It is one of the best ways to expose your portfolio to emerging market equities. In terms of geographical spread, China, Taiwan, and India hold this fund’s largest allocations – 36%, 16.9%, and 14.2%, respectively.
There are about 3,000 holdings in SPEM’s portfolio, worth over $5.5 billion. In addition, the top 10 companies on the list hold 20% of the entire portfolio. In terms of weight, the portfolio favors Financials Services (19.3$), followed by technology (16.8%) and consumer discretionary (16.3%).
With an expense ratio of 0.11%, the SPDR Portfolio Emerging Markets ETF (SPEM) is one of the cheapest options on this list.
If you are a ‘safety first’ investor looking to expose your portfolio to minimum risks, then you should consider the iShares JPMorgan USD Emerging Markets Bond ETF (EMB). EMB invests in U.S. dollar-denominated government bonds issued by emerging market economies. Therefore, it offers higher diversification with government bond fund owning debt positions in over 30 emerging market countries.
EMB is not up there when it comes to price appreciation. That said, you can expect excellent performance in terms of dividends. For instance, it recorded a 7% return over the past year, while paying between 3.96% and 5.64% in dividends over the past years.
EMB’s 0.39% expense ratio is relatively affordable, and it offers exposure to over 600 holdings worth $19 billion.
3. Vanguard FTSE Emerging Markets ETF (VWO)
Now let’s talk about the most popular emerging market ETF – the Vanguard FTSE Emerging Markets ETF (VWO). How popular, you ask? VWO holds over 5,000 stocks from about 25 countries and is worth over $87 billion in assets. It is also super cheap, with just a 0.10% expense ratio.
The fund invests in stocks of Chinese companies headquartered in Hong Kong and “A Class” stocks of companies listed in Shanghai and Shenzhen. As a result, Hong Kong (32%) and China (185) hold the largest chunk of VWO’s portfolio. In addition, 24% of the portfolio’s weight is spread across the top 10 holdings of the portfolio, making it slightly top-heavy.
VWO tracks the FTSE Emerging Markets All Cap China A Inclusion Index and is issued by Vanguard.
4. WisdomTree EM ex-State-Owned Enterprises ETF (XSOE)
A quick background check on WisdomTree would tell you how trusted they are as an asset management firm. And the WisdomTree EM ex-State-Owned Enterprises ETF (XSOE) is one of its many ETFs. XSOE can expose your portfolio to emerging market stocks of non-state-owned companies. According to WisdomTree, a company is state-owned if the government of the region holds over 20% of its ownership.
In terms of performance, XSOE ranks high with about 20% returns over the previous year. Technology (23.4%), consumer discretionary (19.6%), and financials (13.1%) are the three largest sectors by weight in XSOE’s portfolio. It is also slightly top-heavy, with the top 10 holdings accounting for 31% of the entire portfolio.
Since its inception in 2014, XSOE has amassed over 650 holdings and boasts close to $4 billion in total assets worth. The expense ratio is 0.32%.
The iShares Core MSCI Emerging Markets ETF (IEMG) is a great option for investors interested in low-cost investing. It tracks the MSCI Emerging Markets Investable Market Index and focuses on mid- and small-cap emerging market companies.
The geographic diversification here is relatively higher, with South Korea accounting for 14% of the portfolio, thereby reducing the exposure to China to just 6%. Other emerging market economies in the mix are Hong Kong (28%), Taiwan (15%), and India (11%).
IEMG has over 2,600 holdings in its portfolio, over $75 billion in assets, and an expense ratio of 0.11%. It is issued by iShares.
6. Schwab Fundamental EM Large Company Index ETF (FNDE)
Here is an emerging market ETF that focuses on the biggest companies in the emerging markets. Therefore, the Schwab Fundamental Emerging Markets Large Company Index ETF (FNDE) tracks the Russel RAFI Emerging Markets Large Company Index.
FNDE’s portfolio comprises 360 holdings, with a weighted average market cap of $85.5 billion. China, Taiwan, and Russia hold 25%, 18%, and 13% of FNDE’s portfolio in terms of spread. The three major sectors include financials, energy, and information technology, with 26.4%, 21.0%, and 15.2%.
The fund invests about 30% of this into companies above the $70 billion market cap, 68% in companies below $70 billion but not less than $3 billion, and the rest in $3 billion companies.
The expense ratio of FNDE is 0.39%.
7. Schwab Emerging Markets Equity ETF (SCHE)
The final entry on my list of the right emerging market ETFs to buy is the Schwab Emerging Markets Equity ETF (SCHE).
For starters, it is a very cheap – 0.11% expense ratio but solid ETF, tracking the FTSE Emerging Index. It has over $9 billion in total net assets and over 1600 holdings spread across over 20 emerging economies of the world.
SCHE is a top performer in terms of output, returning over 38% in the past year. It gets even better when we talk about dividends, considering SCHE has returned between 2.3% to 4% over the last few years. The top three sectors in terms of weight include Financial Services (21.69%), Industrials (18.05%), and Technology (16.26%).
If you are looking for an emerging market ETF that offers a balance in terms of dividends and performance while allowing you to hold on to more of your returns, SCHE is one of the best options you can consider.
Choosing the right Emerging Market ETFs for your portfolio
The “one size fits all” rule doesn’t apply to investment portfolios. Each investor has specific investment goals they are working towards. And these goals pretty much determine how much skin they can put into the game, and ultimately, what is right for their portfolio.
The right emerging market ETFs to buy for your portfolio must resonate with your goals. A good way to determine this is to assess them based on historical performance, dividend yield, dividend growth, assets under management, and cost.
Final Verdict
More than explaining emerging market ETFs, we have also mentioned which economies or countries fit the description. Countries labeled “emerging economies” have so much to offer in terms of investment opportunities and gains. However, it is essential to note that the list of emerging economies is not final. Global turn of events is the most significant determinant of countries on this list. For example, this year, a country labeled ‘an emerging economy’ can experience sufficient growth and move off the list.
Investing in emerging market ETFs puts you in a strong position to not miss out on these great returns. Consult my list of emerging market ETFs to buy for some top options to consider for your portfolio. For best results, I advise that you compare every entry on my list to see the best fit for your investment goals.