Emerging markets represent a compelling investment opportunity because they invest in fast-growing economies that are poised for significant growth. These markets offer a unique combination of high growth potential and increased risk. For investors seeking to diversify their portfolios, emerging market exchange-traded funds (ETFs) provide an accessible way to capitalize on the economic expansion of these developing countries. However, dealing with the complexities of emerging markets requires a comprehensive understanding of the inherent risks, including political instability, currency fluctuations, and changing regulatory environments. Let’s take a few minutes and go through the basics you need to know to start investing in emerging markets.
Understanding the attractiveness of emerging markets
Emerging markets are countries experiencing rapid economic growth and industrialization. These economies often exhibit common characteristics, such as developing financial markets, higher rates of economic growth than developed markets, a thriving middle class, and increasing foreign investment.
Countries typically classified as emerging markets include Brazil, Russia, India, China and South Africa (collectively known as the BRICS countries), along with several countries in Southeast Asia, Latin America and Eastern Europe. These markets offer great potential due to their expanding consumer bases and increasing integration into the global economy. However, investing in these markets is often accompanied by higher volatility and risks compared to developed markets.
Exchange-traded funds: gateway to emerging markets
ETFs have become popular tools for investors to learn about different asset classes, including emerging markets. These mutual funds hold a basket of securities, such as stocks or bonds, and usually track a specific index. They trade on exchanges like individual stocks, providing investors with intraday liquidity and ease of trading.
Most emerging market ETFs are passively managed, meaning they replicate the performance of a chosen index rather than actively selecting individual stocks. This passive approach generally results in lower expense ratios than actively managed mutual funds. ETFs also provide the benefits of diversification by providing exposure to a wide range of companies within a single investment, reducing the risks associated with investing in individual stocks.
Many ETFs provide exposure to emerging markets, each with unique characteristics that meet different investor needs. When considering investing in emerging market ETFs, it is important to understand the differences between the funds available. Let’s examine three of the most prominent ETFs, each offering a unique approach to tapping into the potential of these markets.
iShares MSCI: A classic, highly liquid option
iShares MSCI Emerging Markets ETF Today
iShares MSCI Emerging Markets ETF
(As of 12/24/2024 at 05:10 PM ET)
- 52 week range
- $37.48
▼
$47.44
- Dividend yield
- 2.44%
- Assets under management
- $17.80 billion
For investors looking for a well-established, highly liquid option, the iShares MSCI Emerging Markets ETF NYSEARCA:EEM He is a strong competitor. The fund, managed by BlackRock, is one of the oldest emerging markets ETFs, boasting a proven track record dating back to its inception in 2003. The EEM aims to mirror the performance of the MSCI Emerging Markets Index, a widely recognized benchmark index that includes… Large and medium companies. – Companies across many emerging market countries.
With $17.80 billion in assets under management as of December 20, 2024, EEM offers unparalleled liquidity, with an average of approximately 28 million shares traded daily. This high trading volume makes it an excellent choice for investors who prioritize the ability to enter and exit positions quickly and efficiently. It is important to note that EEM does not include South Korea in its holdings. EEM has an expense ratio of 0.70%. While this is higher than some of its peers, the fund’s liquidity and consistent presence may justify the cost for confident investors.
Vanguard FTSE: Broad diversification at a competitive price
Vanguard FTSE Emerging Markets ETF Today
Vanguard FTSE Emerging Markets Fund
(As of 12/24/2024 at 05:19 PM ET)
- 52 week range
- $38.83
▼
$49.57
- Dividend yield
- 3.57%
- Assets under management
- $80.57 billion
If broad diversification and cost efficiency are your primary concerns, the Vanguard FTSE Emerging Markets ETF NYSEARCA:VWO It is an exceptional choice. This ETF tracks the FTSE Emerging Markets All Cap China A Inclusion Index, which includes a broad basket of more than 4,500 stocks, including large-cap, mid-cap and small-cap companies in emerging markets, including South Korea.
This comprehensive coverage provides investors with exposure to a broader range of companies and sectors than more focused funds. VWO’s notable advantage is its remarkably low expense ratio of just 0.08%, making it one of the most cost-effective options in the emerging markets space. This low cost, combined with the fund’s comprehensive diversification, has attracted significant assets, with assets under management reaching US$81.16 billion as of December 20, 2024.
Furthermore, Vanguard recently reviewed VWO’s diversification policy. This change allows the Fund to maintain its investment objective of tracking its target index even if it becomes “de-diversified” due to index rebalancing or market movements. For long-term investors seeking broad exposure to emerging markets at an unbeatable price, VWO makes a compelling proposition. The fund also has a dividend yield of 3.59% as of December 20, 2024, the highest dividend yield of the three funds reviewed.
iShares Core MSCI: comprehensive core proprietary
iShares Core MSCI Emerging Markets ETF Today
iShares Core MSCI Emerging Markets ETF
(As of 12/24/2024 at 05:19 PM ET)
- 52 week range
- $47.33
▼
$59.00
- Dividend yield
- 2.37%
- Assets under management
- $81.80 billion
For investors looking for a balanced approach that combines broad diversification with cost effectiveness, the iShares Core MSCI Emerging Markets ETF NYSEARCA: IEMG It is an attractive option. This fund, also managed by BlackRock, tracks the MSCI Emerging Markets Investable Index (IMI), which includes large-cap, mid-cap and small-cap companies, providing a comprehensive representation of the emerging markets universe, including South Korea.
With an expense ratio of 0.09%, IEMG is highly cost competitive. As of December 20, 2024, the fund’s assets under management were $81.80 billion, reflecting its popularity among investors. IEMG owns approximately 2,957 shares, providing a level of diversification that exceeds EEM but does not quite reach the breadth of VWO. IEMG provides sufficient liquidity for most investors. For those looking for a core property in emerging markets that balances broad exposure with cost effectiveness, IEMG is an excellent choice.
Investing in the giants of tomorrow
Emerging market ETFs can be a valuable addition to a diversified investment portfolio, providing exposure to the growth potential of developing economies. Each of the three funds we reviewed today offer unique features and meet different investment goals.
However, investors should carefully consider the risks associated with emerging markets and conduct due diligence before investing. Staying informed about global economic trends and consulting with a financial advisor can help investors make informed decisions about incorporating emerging market ETFs into their portfolios.
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