Emerging Markets refer to nations that are growing and becoming more engaged in the global economy. They are a crucial piece in any globally diversified portfolio. Here we’ll look at the best Emerging Markets ETFs to get in on this corner of the market.
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Introduction – Why Emerging Markets?
Emerging Markets are growing countries that are becoming more active in the global economy. As such, they have a lower income per capita than developed markets. The growth of these economies typically coincides with industrialization and an increased standard of living. Notable emerging market economies include Russia, Mexico, China, Egypt, Taiwan, India, and Brazil.
Emerging markets comprise about 10% of the global stock market and about 25% of the international (ex-US) stock market. They have outpaced the larger international stock market historically. Arguably more importantly, emerging markets have a lower correlation to the U.S. stock market than international developed markets, offering a superior diversification benefit. Ray Dalio himself, for example, is very bullish on China as a hedge against U.S. market downturns.
Obvious risks include political instability, currency devaluation, infrastructure issues, lack of liquidity, market inefficiency, and absence of free market forces. These risks diminish or disappear as emerging market economies grow. Countries can be upgraded or downgraded from classification as an emerging market at any time, based on factors like income levels, financial systems, and growth.
Emerging Markets vs. Developed Markets
Think of emerging markets as having more room to grow versus developed markets, similar to small cap stocks relative to large cap stocks. Emerging markets have historically outperformed international developed markets, albeit with much greater volatility and risk. Thankfully, returns from emerging markets stocks have compensated investors for this increased level of risk, with emerging markets still delivering higher risk-adjusted returns than ex-US developed markets historically:
The 5 Best Emerging Markets ETFs
More tools have emerged in recent years to efficiently access emerging markets as an investment. ETFs are the most popular way. Below we’ll look at the best emerging markets ETFs.
VWO – Vanguard FTSE Emerging Markets ETF
The Vanguard FTSE Emerging Markets ETF (VWO) is the most popular ETF for this space, with over $87 billion in assets. It also happens to be the most affordable, with an expense ratio of 0.10%. The fund seeks to track the FTSE Emerging Markets All Cap China A Inclusion Index. It has over 5,200 holdings.
IEMG – iShares Core MSCI Emerging Markets ETF
The iShares Core MSCI Emerging Markets ETF (IEMG) seeks to track the MSCI Emerging Markets Investable Market Index. It has over $54 billion in assets and an expense ratio of 0.13%. Note that the MSCI index here includes South Korea, while FTSE indexes (e.g. VWO above) do not.
EEM – iShares MSCI Emerging Markets ETF
The iShares MSCI Emerging Markets ETF (EEM) is the bigger, more liquid brother to IEMG above. Short-term traders will likely prefer to use EEM over IEMG. This fund has a relatively high expense ratio of 0.68%.
SCHE – Schwab Emerging Markets Equity ETF
The Schwab Emerging Markets Equity ETF (SCHE) is another affordable Emerging Markets ETF, with an expense ratio of 0.11%. This fund should be considered comparable to VWO from Vanguard. SCHE seeks to track the FTSE Emerging Index. It has over $7 billion in assets.
SPEM – SPDR Portfolio Emerging Markets ETF
The SPDR Portfolio Emerging Markets ETF (SPEM) seeks to track the S&P Emerging BMI Index. It has an expense ratio of 0.11%.
Where to Buy These Emerging Markets ETFs
All these emerging markets ETFs are available at M1 Finance. The broker has zero trade commissions and zero account fees, and offers fractional shares, dynamic rebalancing, and a sleek, user-friendly interface and mobile app. I wrote a comprehensive review of M1 Finance here. Investors outside the U.S. can find these ETFs on eToro.
Disclosures: I am long VWO.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.