Emerging Markets have paid a significant risk premium historically. So have Value stocks. Here are the best Emerging Markets Value ETFs to capture this narrow intersection across different cap sizes. Spoiler: They're not AVEM or AVES.
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Introduction – Why Emerging Markets Value ETFs?
If you've landed on this page because you're looking for an Emerging Markets Value ETF, you probably already know the answer.
Though they have suffered for extended periods historically, Value stocks have paid a significant risk premium historically, and the Value factor has been pervasive across geographies and cap sizes. I delved into this factor and others in a separate post here. Simultaneously, Emerging Markets carry unique risks for which investors tend to be compensated handsomely.
Value stocks beat Growth stocks in 2021 and 2022, so it may be making its comeback and Emerging Markets returned 155% for the famous Lost Decade of 2000-2009 when the S&P 500 finished down 10%, providing a demonstrable diversification benefit for U.S. investors.
Combining these two results in a narrow segment of the global stock market (about 6% at global market cap weights) with the greatest expected returns, and conveniently the lowest correlation to U.S. stocks within the global equities universe. Below are the best ETFs to capture this segment, which allow investors to avoid trying to pick individual stocks in a volatile geography.
The 2 Best Emerging Markets Value ETFs
Given all that, here are what I think are the two best Emerging Markets Value ETFs across all cap sizes. Ironically, neither of them even has “value” in the name.
I included both of the ETFs below in my Vigorous Value Portfolio that I designed for those wanting to place some bets on the Value factor premium.
FNDE – Schwab Fundamental Emerging Markets Large Company Index ETF
FNDE from Schwab applies some screens for revenue, cash flow, and dividends, which gets it some somewhat naive yet appreciable exposure to the Value and Investment factors.
The fund has amassed over $4.5 billion in assets since it launched in 2013. It uses RAFI‘s fundamental factors in selecting and weighting its constituent stocks. The fund is about 90% large caps and 10% mid caps, so we would call it an Emerging Markets large cap value fund.
While the cost of FNDE may seem high at first glance at 0.39%, it's actually pretty affordable compared to its competitors, and we would expect the premium delivered by its impressive exposure to outweigh its fee. Moreover, it's more expensive to trade in Emerging Markets stocks, so we'd expect a relatively higher fee anyway.
For those wondering, the elephant in the room here is AVEM, Avantis's offering for Emerging Markets large cap value that launched in 2019. While it's slightly cheaper at 0.33% and provides a higher loading on the Profitability factor (like we'd expect from Avantis), its other factor loadings appear to be worse than FNDE. That said, their performance has been very close, so either would be a good choice and you could use them as a pair for tax loss harvesting. I'd stick with FNDE.
Another competitor is AVES that ends up basically being mid-cap value in Emerging Markets, so I'll discuss it in the next section.
Other ETFs considered included: EEM, IEMG, XSOE, DEM, AVEM, AVES, PXH, DVYE
DGS – WisdomTree Emerging Markets SmallCap Dividend Fund
FNDE above provides large cap exposure with a bit of mid caps. So now we need small cap value stocks in Emerging Markets.
There are only a handful of options for this tiny segment that comprises about 1% of the global stock market. We're interested in it, though, because this tiny segment has the greater expected returns than that other 99%.
I like DGS for this segment, which is a somewhat pricey dividend fund from WisdomTree that launched in 2007. Don't let that dissuade you, though. This fund is a powerhouse of factor exposure that I still like even more than so-called “factor” funds for this space.
This shouldn't be too surprising, as it's not at all uncommon for older dividend- or style-focused funds to look better than newer “factor” funds that are simply trying to capitalize on the buzzword. RPV is an example for U.S. large cap value stocks.
Factor investors are wise to this fact, as DGS boasts over $2.6 billion in assets, even with its relatively high fee of 0.58%. This is the most expensive segment of the market to trade in, so we shouldn't be too shocked by that expense ratio.
DGS seeks to track the WisdomTree Emerging Markets SmallCap Dividend Index, which weights constituent stocks by their dividend yield, causing it to tilt mid cap.
Factor investors like myself thought AVES, Avantis's newest offering for more aggressive factor tilts in Emerging Markets, might dethrone DGS when it launched in late 2021. While it's certainly no slouch and would still be a fine choice, I still prefer the looks of DGS, even with its higher fee.
Unlike DGS, AVES still has negative loading on Size, and its other loadings are comparatively worse than those of DGS. Even just looking at their weighted average market caps, DGS is roughly 1/5 that of AVES. As such, like its older brother AVEM, AVES can be thought of as more of an all-cap (effectively mid-cap) value fund for Emerging Markets, while DGS is truly small cap value.
That said, investors looking to minimize fees will like that it costs much less than DGS at 0.36%. They could also make a great pair for tax loss harvesting in taxable space. One could also argue that you could use a single fund like AVEM or AVES in place of both FNDE and DGS if you wanted that greater simplicity and all-cap coverage. If that were my goal, I'd take AVES.
Other ETFs considered included: UEVM, EEMS, AVEM, AVES
Adding These Emerging Markets Value ETFs To Your Portfolio
Both of these Emerging Markets value ETFs above should be available at any major broker. My choice is M1 Finance. M1 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 use eToro.
Also, again, both of these ETFs above are incorporated into my Vigorous Value portfolio, if that interests you.
Disclosures: I am long DGS in my own portfolio.
Disclaimer: While I love diving into investing-related data and playing around with backtests, this is not financial advice, investing advice, or tax advice. The information on this website is for informational, educational, and entertainment 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. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. I mention M1 Finance a lot around here. M1 does not provide investment advice, and this is not an offer or solicitation of an offer, or advice to buy or sell any security, and you are encouraged to consult your personal investment, legal, and tax advisors. All examples above are hypothetical, do not reflect any specific investments, are for informational purposes only, and should not be considered an offer to buy or sell any products. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here.
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