Investments

What Emerging Markets To Invest In

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 15 minute read

Opportunity abounds in emerging markets. As these markets enter their development stages, early investors stand to win significantly from their foresight. It might be difficult and hazardous to identify individual investments in emerging markets.

There are a lot of small-cap and penny companies that have a sketchy history of profitability, but they’re nevertheless popular among investors. However, novice investors are frequently enticed by the tempting rewards offered by tapping into opportunities early and taking a risk.

Many investors seek exposure to emerging economies via exchange-traded funds (ETFs) to avoid the time and effort required to do their own research on the market and the inherent risk of investing in the high-volatility companies that are common in these regions.

What Are ETFs for Emerging Markets?

In order to participate in stocks and bonds issued by companies in emerging markets, exchange-traded funds (ETFs) pool the money of many investors. The question is, what exactly is an emerging market?

Emerging Market ETFs: Types of Investments

Exchange-Traded Funds (ETFs) that invest in emerging markets can be either

1. The Emerging Countries

A fast-growing economy is an emerging economy. These economies are still in the process of developing, but they are rapidly closing the gap between the emerging and developed stages of economic development. 

Thus, corporations operating in emerging markets and listed on stock exchanges can likewise see impressive growth. China, Brazil, India, Taiwan, Russia, and South Korea are among the most talked about emerging economies in the world of finance.

2. The Emerging Industries

Industries that serve new types of products are considered “emerging.” The COVID-19 pandemic was responsible for one of the most successful examples of a new industry. 

Since the beginning of the pandemic, the biotechnology industry has joined forces with manufacturers of cleaning products, sanitizers, and PPE to combat the spread of the disease. This has resulted in the formation of the COVID-19 business, which has had impressive growth.

Emerging Market ETF Characteristics

In spite of their differences, emerging economies and emerging industries have a key characteristic: they both feature early-stage development prospects that are far higher than those found in developed markets.

Most of the funds on this page are international and aim to capitalize on growth in developing nations. With diversity in mind, and the goal of providing investors with broad exposure to the benefits these countries offer, emerging markets exchange-traded funds (ETFs) concentrate their allocation strategy on these young, high-growth markets.

These exchange-traded funds (ETFs) trade on major U.S. exchanges like the Nasdaq and the New York Stock Exchange, making them highly liquid and simple for investors to buy and sell.

How to Compare ETFs for Emerging Markets

All funds that invest in emerging economies are not the same. Some will have a higher rate of return, a higher rate of fee, or a higher level of risk. Investing in an emerging markets ETF requires careful consideration of certain crucial statistics of each fund before making a rash decision.

Cost

The expense ratio of an exchange-traded fund measures the overall cost of buying and holding its shares. The typical yearly fee for an exchange-traded fund is 0.44%, as reported by the Wall Street Journal. But the fees might differ widely from one fund to the next.

Remarkable Past Accomplishment

When investing in any exchange-traded fund (ETF), but especially one that focuses on emerging markets, it is essential to consider the fund’s past performance. Investing in emerging markets carries a larger degree of risk than doing so in more established markets, but also offers more potential for profit.

Therefore, it is crucial to put your money into exchange-traded funds (ETFs) that have a track record of delivering impressive returns.

Dividend Yield

Dividend payments are common for stocks in emerging markets. There are a few developing market funds that offer dividend yields that are more attractive than those offered by the utility industry, which is widely recognized for its generous dividend payments.

You should prioritize selecting emerging markets ETFs with high dividend yields if you are investing for income.

Dividend Growth

An ETF’s health can be gauged in part by how rapidly its dividends are increasing over time. After all, the fund’s profitability and dividend payments should both increase along with its size.

Management of Assets

Assets under management, or AUM, is the sum total of client funds that the ETF oversees. If you invest in a less-than-favorite fund, you may have trouble selling your shares when you need to.

Assets in general flock to the most well-known ETFs. If you need cash quickly, you can do it with little hassle by selling these funds.

The Top 10 ETFs for Emerging Markets

1. The Vanguard FTSE Emerging Markets ETF (VWO)

When it comes to high-quality investment funds, many investors choose Vanguard. Vanguard funds have become very popular due to their low expense ratios and the company’s reputation for providing appealing rewards for clients.

Company stocks from emerging economies like China, Brazil, Taiwan, and South Africa are what the Vanguard FTSE Emerging Markets ETF is all about.

The ETF is constructed to replicate the performance of the Financial Times Stock Exchange (FTSE) Emerging Markets All Cap China A Inclusion Index. This index represents a broad cross-section of emerging market firms across market capitalization and industry.

Here are some of the fund’s most important metrics:

  • The expense ratio of this ETF is an exceptionally low 0.10%, matching that of the vast majority of Vanguard products.
  • Historically, the ETF has not offered very impressive returns. Gains of almost 40% were seen by VWO owners over the past year. Annualized returns over the past three and five years are 11.75 and 11.93 percent, respectively.
  • The dividend yield for the VWO has typically fluctuated between a little over 2% and almost 4% during the course of its history. Don’t forget that the high-dividend utility industry averages a dividend yield of less than 4%.
  • Revenue Sharing; The ETF’s Dividend History Seems Unreliable. However, a rising pattern can be seen. In previous years, dividend payments started out slowly in the second quarter before skyrocketing in the first. 
  • The dividends paid by the VWO have been growing steadily throughout the years. The fund has gathered over $117 billion in assets from investors. Since the fund is so widely sought after, selling out should be a simple and rapid process.
  • ETF VWO is not to be disregarded due to its unprecedented rate of growth and industry-leading expense ratio.

2. The MSCI Emerging Markets ETF from iShares (EEM)

As a reputable Wall Street institution, iShares administers a wide variety of investment-grade products, including exchange-traded funds (ETFs), mutual funds, and index funds.

To replicate the performance of the MSCI Emerging Markets Index, iShares MSCI Emerging Markets ETF invests in stocks of companies with a primary listing on the MSCI Index. More than 800 large and mid-cap equities from emerging markets make up the EEM portfolio, making it a highly diversified way to gain exposure to the best companies in these economies.

The most important numbers are as follows:

  • The fund has an above-average cost ratio of 0.7%. Nonetheless, the impressive track record of success over the years justifies the premium price.
  • The fund has a compelling historical performance. The ETF’s annualized return to its shareholders is at 20.96%. Gains during the past three and five years, on an annualized basis, have averaged 7.03% and 9.55%, respectively.
  • The dividend yield of the ETF is 1.46 percent. Although the dividend yield is not particularly high compared to other emerging markets funds, it is nevertheless a decent way to supplement your income.
  • Dividend Growth The fund’s dividend growth has been erratic during the previous few years. Its dividend payouts have increased steadily over time, though.
  • There are more than $30 billion in assets under management, making this fund yet another widely sought-after investment vehicle with minimal risk of loss due to market fluctuations.
  • The large returns investors have seen over the past five years make the fund’s relatively high expense ratio difficult to justify. The ETF is deserving of your attention because of its excellent management and rising payouts.

3. The iShares MSCI Emerging Markets ETF (IEMG)

The iShares Core MSCI Emerging Economies ETF is an exchange-traded fund that aims to replicate the performance of an index composed of small, mid, and large capitalization companies from emerging markets around the world. 

The most important numbers are as follows:

  • The fund’s expense ratio of 0.11% is competitive with other low-cost options, such as those from Vanguard.
  • When compared to other emerging market’s ETFs, this one has not only a solid track record of profitability but also among the lowest expenses. The ETF has returned 43.43% in the past year, 11.34% over the past three years, and 12.37% over the past five years, on an annualized basis.
  • In the previous few years, the dividend yield on the IEMG ETF has fluctuated between 1.6% and 2.6%. The fund pays out dividends that are not the best in the industry but are nevertheless decent.
  • As is customary with dividend-paying ETFs, this fund’s dividend payments experienced some fluctuation during the past three years, but overall, they increased.
  • Still, the fund has generally resulted in dividend increases at a consistent rate.
  • The IEMG Exchange Traded Fund (ETF) has attracted more than $83 billion in AUM, making it one of the largest funds in existence.
  • Investing in the fund is highly recommended because of its many advantages. The ETF has a proven track record of providing attractive returns, and it also pays out dividends that generally increase in size over time. Overall, it’s another ETF that deserves close attention.

4. The Schwab Equity ETF for Emerging Markets (SCHE)

When discussing the best exchange-traded funds (ETFs), it is impossible to leave out Charles Schwab, another of the most reputable financial houses on Wall Street today. Schwab’s Emerging Markets Equity ETF is benchmarked against the FTSE Emerging Index.

The fund is one of the largest diversified portfolios of stocks in emerging markets today, with investments in over 20 emerging economies. The portfolio includes both small- and large-cap stock options. 

The most important numbers are as follows:

  • The fund’s expense ratio is just 0.11%, putting you in the same ballpark as some of the lowest-cost ETFs available today and allowing you to keep more of your gains without sacrificing performance.
  • In terms of past performance, the SCHE ETFl has been on par with other top performers in the developing markets space. Investors have seen a return of almost 38% in the past year. Average returns for the past three and five years are 11.5 and 12.1 percent, respectively.
  • SCHE ETF’s dividend yield has been among the best on this list over the previous few years, fluctuating between 2.3% and 4%.
  • For the most part, this fund has shown impressive dividend increases over the long term, with the coronavirus epidemic being the only exception.
  • The SCHE ETF is one of the most widely held investment vehicles, with almost $10 billion in AUM.
  • When it comes to returns and distributions, this ETF is among the best in the emerging markets category.
  • As an added bonus, this ETF is a favorite among those who invest in emerging countries because of its minimal expenses and top-tier management team.

5. The SPDR Portfolio Emerging Markets ETF (SPEM)

The SPDR Portfolio Emerging Markets Exchange-Traded Fund is a leading option among emerging markets funds. It is managed by State Street Global Advisors, a subsidiary of State Street Corporation.

The fund’s objective is to replicate the investment results of the S&P Developing BMI Index, a broad market index composed primarily of stocks traded on emerging market exchanges. Because of this wide range of stock sizes, the SPEM can be thought of as a diversified investment in emerging markets.

The most important numbers are as follows:

  • The SPEM ETF has a very low expense ratio of 0.11%, making it one of the least expensive ETFs available.
  • With a strong track record dating back several years, this fund consistently ranks among the top ETFs in terms of returns. Gains of over 38% have been realized by the ETF over the past calendar year. Annualized returns for the past three and five years are 11.45% and 12.65%, respectively.
  • Dividend Yield This ETF has generated dividend yields of 1.7% to 2.9% over the past three years, indicating that investors in the fund can expect to receive above-average returns on their capital.
  • The fund’s dividend payments have grown steadily during the past few years.
  • However, earnings dropped as the COVID-19 pandemic spread over the world in early 2020. The fact that the SPEM ETF manages more than $6.4 billion in assets indicates its widespread appeal.
  • This fund gives investors access to a diverse group of emerging market companies at a far lower cost than is typical.
  • Gains over the past few years speak for themselves, and the added bonus of dividend payments makes this ETF deserving of your attention.

6. The Invesco RAFI Strategic Emerging Markets ETF (ISEM)

The Invesco Strategic Emerging Markets Index is the foundation for the Invesco RAFI Strategic Emerging Markets ETF, which invests in larger, higher-quality companies in emerging markets. Large-cap stocks from a variety of emerging markets and industries make up the bulk of the fund’s holdings. 

The most important numbers are as follows:

  • Although the expense ratio of 0.35% isn’t the lowest available, it is significantly lower than the average for similar products.
  • Because of the fund’s youth, there is little performance data available. But in the last quarter, ETF shareholders have seen returns of nearly 43%.
  • Dividend YieldThis ETF has a dividend yield of 2.4 percent. That’s a high return, making this an excellent investment for income generation.
  • Lack of Historical Data for Dividend Growth The ISEM ETF is a newer ETF, so there is not yet enough data to provide reliable dividend growth projections.
  • Finally, the ETF has a modest amount of assets under management, at slightly over $28 million. The good news is that number is rapidly expanding.

Due to its status as a relatively young fund focused on developing economies, ISEM investors must be aware of the inherent risks associated with this type of investment.

Nonetheless, the ETF’s growth of over 43% over the previous year is intriguing, and the Invesco management team supporting the ETF is one of the best on Wall Street, so it’s worth keeping an eye on.

7. The Schwab Fundamental EM Large Company Index ETF (FNDE)

With this in mind, Schwab created the Schwab Fundamental EM Large Company Index ETF to mirror the performance of the Russell RAFI Emerging Economies Large Company Index, which is comprised of the largest companies in emerging markets and is weighted by fundamental factors. Large-cap equities from a variety of emerging markets make up the bulk of the fund’s assets. 

The most important numbers are as follows:

  • The Schwab Fundamental EM Large Company Index ETF has an average cost ratio of 0.39%.
  • The Schwab Fundamental EM Large Company Index ETF has a solid performance record going back several years. Over the previous 12 months, this investment has returned 41.37 percent to its backers. 
  • Over the previous three years, profits have increased at a rate of 8.38% annually, and over the past five years, they have increased at a rate of 11.57% annually.
  • The dividend yield on the Schwab Fundamental EM Large Company Index ETF is at 2.79 percent at the moment. While the ETF’s dividend yield isn’t the highest on this list, it is still rather reasonable.
  • The dividend increase of the FNDE ETF has been erratic during the previous few years. On the other hand, the fund has a solid track record of attractive dividend payouts.
  • At now, the fund is stewarding assets worth $4.75 billion. Even if it’s not the most well-known fund on the list, a pool of roughly $5 billion in investments speaks volumes about its appeal.

Over the past year, the Schwab Fundamental EM Large Company Index ETF has suffered, largely due to the COVID-19 outbreak. The ETF’s long-term historical performance, however, has been impressive. This ETF is exceptional because of its excellent management and high dividend yield.

8. The SPDR MSCI Emerging Markets Fossil Fuel Reserves Free ETF (EEMX)

Those interested in gaining diverse exposure to emerging market equities with a socially conscious slant may want to consider the SPDR MSCI Emerging Markets Fossil Fuel Reserves Free ETF, which is also managed by State Street Global Advisors.

An exchange-traded fund (EEMX) that mirrors the performance of the MSCI Emerging Markets Index minus the effects of fossil fuels. The fund is aimed at those who want to invest in emerging economies without supporting corporations that hold fossil fuel deposits.

  • Although the EEMX’s annual expense ratio of 0.30% is higher than the typical ETF’s 0.44%, it is still a cheap option for those looking to invest in emerging markets. As expenditures for socially responsible ETFs are often greater, the low cost of this fund is all the more impressive.
  • Both the SPDR Emerging Markets ex-Fossil Fuels Index ETF and the practice of social impact investing in the context of climate change are new to the investment world. 
  • The fund’s performance over the past year, however, has been excellent in comparison to any benchmark, with gains of over 39%. The fund has produced average yearly gains of over 11% during the past three years.
  • Even though the EEMX has already demonstrated appealing performance in terms of price appreciation, it also provides dividends at a yield of roughly 1.38%. This is the cherry on top!
  • Since this ETF is still in its infancy, there is not yet enough historical information to draw any firm conclusions on its dividend growth. The fund is currently managing $188.37 million in assets. That’s not nearly as much as some of the other ETFs on this list, which manages billions of dollars, but it’s still quite a feat for such a new fund.

Concerns about the SPDR Emerging Markets ex-Fossil Fuels Index ETF’s past performance and dividends are understandable, given the fund’s limited track record to date. The fund may be new, but its low expenses and strong gains over the past year have attracted a lot of investors.

9. The WisdomTree EM ex-State-Owned Enterprises ETF (XSOE)

When it comes to managing investments, WisdomTree is another organization at the top of the list. The organization has an extensive catalog of ETFs suitable for investors of all stripes.

With the WisdomTree EM ex-State-Owned Enterprises ETF, investors may have access to a diversified portfolio of stocks from developing markets that are not owned by the government. The fund considers a region to be state-owned if the government owns more than 20% of the businesses located there.

Here are the most important numbers:

  • The fund’s expense ratio is 0.32%, offering it another option with a lower management charge compared to its peers.
  • The XSOE ETF has been a phenomenal performer historically, returning over 20% annually to investors. The fund has produced annualized returns of 11.10% over the past three years, and 13.49% over the past five years.
  • Dividend Yield The ETF now offers a dividend yield of roughly 1.4%, so in addition to the fund’s already stellar results, investors can look forward to receiving healthy dividend payments.
  • The XSOE ETF’s dividend payment growth has been sluggish during the past few years. An inability to increase dividends is less concerning when compared to the fund’s massive price increase.
  • More than $4.7 billion in assets are managed by the fund, making it a desirable choice for exchange-traded fund investors.

Over the past year, the XSOE ETF has gained 20%, making it one of the greatest performers on Wall Street. Despite its young age (it was started in 2006), WisdomTree has quickly established itself as one of the industry’s most reliable fund managers. If the fund is managed well and produces high returns, then receiving dividends is the frosting on the cake.

10. The iShares JPMorgan USD Emerging Markets Bond ETF (EMB)

The iShares JPMorgan USD Developing Markets Bond ETF is a fantastic choice for those seeking a safer play in the emerging markets sector. The ETF provides broad exposure to government bonds issued in the United States denominated in dollars by countries with emerging economies.

Having holdings in government debt from over 30 different developing countries makes this a well-diversified emerging market bond portfolio. 

The most important numbers are as follows:

  • The iShares JPMorgan USD Emerging Markets Bond Exchange Traded Fund has an expense ratio of 0.39%. Even though they aren’t the cheapest option, the prices are still reasonable.
  • The EMB has not had the best historical performance among these ETFs. However, it is not designed to compete with stock exchanges. Bonds are a more secure investment option than other types of investments. When compared to other bond investments, the fund’s 7% return over the preceding year is excellent. This ETF has generated annualized returns of 6.64% for the past three years and 4.35% for the past five years.
  • Strong dividends are a hallmark of the iShares JPMorgan USD Emerging Markets Bond ETF’s reputation. The rather moderate but continuous price appreciation of the ETF over the previous few years has been more than compensated for by the dividend yields, which have ranged from 3.96% to 5.64%.
  • A lack of dividend increase has plagued the EMB for the past five years.
  • Nonetheless, the ETF is a good choice for income investors because of a dividend yield that is comparable to or higher than the high-dividend-producing utility sector.
  • Among the most widely held emerging markets exchange-traded funds (ETFs) on Wall Street today, the fund has seen inflows of more than $19.7 billion from investors.

The iShares JPMorgan USD Emerging Markets Bond ETF may not be in the same league as other emerging markets funds in terms of capital appreciation, but it is one of the best in terms of dividends.

Investing in government bonds issued by emerging markets rather than equities is one way to mitigate the dangers associated with the latter’s notoriously unstable stock exchanges. Thus, the EMB ETF is deserving of consideration.

Bottom Line

Exchange-traded funds (ETFs) are an excellent alternative if you want exposure to emerging economies but lack the time or market knowledge to be successful in the field.

These investments are not only made by some of Wall Street’s brightest brains, but they also provide broad exposure to the developing markets sector. However, investors should be aware that not all ETFs are the same, much like stocks. Even with high-quality funds, making a wise investment call requires due diligence and in-depth familiarity with the asset class.

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