Emerging markets, often characterized by rapid economic growth, are countries transitioning from developing to developed economies. These nations typically have lower per-capita incomes than developed countries but offer economic potential.
BRICS is an acronym for some of the top emerging market countries — Brazil, Russia, India, China and South Africa — but other nations are very much in play as well, such as Mexico, Indonesia, South Korea, Turkey and Taiwan.
With their rapid industrialization and expanding middle class, emerging markets have become an avenue for global investors seeking higher returns. Exchange-traded funds (ETFs) are a popular way to access this potential.
What is an emerging market ETF?
An emerging market ETF is a type of investment vehicle that tracks the performance of a basket of stocks from developing countries. ETFs are traded on stock exchanges, similar to individual stocks, but they offer a more diversified approach to investing.
Benefits of investing in emerging market ETFs include:
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Diversification: ETFs provide instant diversification across a wide range of emerging market stocks, reducing the risk associated with investing in a single company or country.
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Exposure to growth opportunities: Emerging markets are home to rapidly expanding companies and industries, providing potential opportunities to participate in their growth.
Emerging market countries often enjoy rapid GDP growth but that doesn’t always translate into faster stock gains. Many emerging market ETFs — including several on this list — have fallen short of the S&P 500’s performance over the last five years, due to a variety of factors including political instability, economic fluctuations and currency volatility.
7 best emerging market ETFs
If you’re looking to invest in emerging markets but don’t know much about international investing or simply don’t want to hand-pick individual stocks, an emerging market ETF can be a convenient starting point.
Bankrate selected these top-performing funds based on the following criteria:
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U.S. funds that appear in ETF.com’s screener for emerging markets
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Funds among the top performers over the last five years
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Performance measured on Sept. 26, 2024, using the most recent figures
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No inverse or leveraged ETFs
iShares MSCI Emerging Markets Small-Cap ETF (EEMS)
This ETF from iShares tracks the investment results of an index composed of small public companies in emerging market countries. Top countries in the fund include India, Taiwan and South Korea. Its top three sectors are industrials, information technology and consumer discretionary.
Freedom 100 Emerging Markets ETF (FRDM)
This ETF seeks to track the total return performance of the Life + Liberty Freedom 100 Emerging Markets index. According to the fund manager, the index invests in companies located in countries with higher personal and economic freedom scores. Taiwan, Chile and South Korea are among the countries with the heaviest weightings.
Cambria Emerging Shareholder Yield ETF (EYLD)
This actively managed ETF tracks companies in emerging market countries that are returning cash to shareholders through dividends, buybacks and net debt reduction. As of Aug. 1, 2024, the fund had significant investment exposure to companies in the information technology, financials and energy sectors. Top-weighted countries include Taiwan, China and South Korea.
Kraneshares MSCI Emerging Markets ex China ETF (KEMX)
This fund is benchmarked to the MSCI Emerging Markets ex China index, which tracks large- and mid-cap companies in emerging market nations, excluding China.
SPDR S&P Emerging Market Dividend ETF (EDIV)
The fund tracks the performance of the S&P® Emerging Markets Dividend Opportunities index. The fund gives exposure to 100 emerging market stocks that pass stability screens and offer the highest risk-adjusted dividend yield. The index is weighted based on the stocks’ trailing-12-month dividend yields. Finally, no single country or sector can make up more than 25 percent of the fund, and no stock can have a position size in excess of 3 percent.
VictoryShares Emerging Markets Value Momentum ETF (UEVM)
This fund tracks the performance of the Nasdaq Victory Emerging Market Value Momentum index, which provides exposure to value and momentum factors. It aims to balance risk across the fund by giving greater weighting to stocks with lower realized volatility.
Schwab Fundamental Emerging Markets Equity ETF (FNDE)
This ETF tracks the total return of an index that measures the performance of large companies in emerging market countries. Top sectors in this passively managed fund include financials, information technology and energy. Taiwan, China and India are among the countries with the greatest representation.
Are emerging market ETFs a good investment?
Emerging market ETFs offer investors a convenient and diversified way to gain exposure to the growth potential of international companies. However, investing in emerging markets involves higher risks than investing in developed markets, even in ETF form.
Some of the risks of investing in emerging markets include:
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Political instability: Political unrest, coups and changes in government policies can create uncertainty and volatility in emerging markets. Examples of geopolitical risks in recent years include the war between Russia and Ukraine and the tariffs imposed on Chinese companies.
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Economic challenges: Developing economies may face challenges such as inflation, high debt levels and trade disputes, which can impact their growth and stock market performance.
Before investing in an emerging market ETF, it’s important to do your homework, just like you would with individual stocks. ETFs can vary significantly in their holdings, with some centered on specific themes, like small-cap companies, while others focus on other criteria, such as high-dividend-paying stocks.
Always pay attention to the expense ratio, too. This fee, expressed as a percentage of your invested assets, is deducted annually and directly impacts your returns.
While the ETFs on this list may be some of the top performers over the past five years, there are less expensive emerging market funds out there. SPDR Portfolio Emerging Markets ETF has an expense ratio of 0.07 percent, and the Vanguard FTSE Emerging Market ETF has an expense ratio of 0.08 percent.
Aside from price, a good ETF will carefully balance risk while remaining broadly representative of emerging market countries.
Finally, it’s important to understand whether a fund is passively or actively managed.
A passive ETF tracks a broad market index like the MSCI Emerging Market index, which includes 24 countries and is one of the most commonly followed benchmarks in this space. With passive ETFs, the fund manager simply buys the same stocks as the index.
On the flip side, active ETFs rely on a fund manager to select individual stocks. The manager aims to outperform the market by using various strategies, such as growth or value investing. While there’s a potential for higher returns, active ETFs often come with higher fees, greater volatility and no guarantee of outperformance.
Bottom line
Emerging market ETFs offer a way to invest in growing economies, but they come with risks. Before investing, research the specific holdings, country allocation and expense ratio of each fund. And while this list highlights some of the top ETFs over the past five years, it’s important to remember that past performance doesn’t guarantee future results.
Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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