Investing in emerging markets is an awesome way to capitalize on the growing and innovating world. If you believe that the world will get better in the future, then you should be in emerging markets. But how should you invest?
Should you be in mutual funds or stocks? Should you hire a financial advisor or go about it alone? There are so many options and such little information about all of them. This post will answer some of these questions by uncovering the BEST emerging market ETFs of 2021.
By learning about these ETFs, at least you can be clear on which options are available to you if you choose to go the solo ETF route. You'll learn about exactly what emerging markets are, the pros and cons of emerging markets, and how you can maximize your investment returns with these 5 emerging market ETFs. Let's dive in.
What Are Emerging Markets?
Before diving into the best emerging market ETFs, let's get clear on exactly what emerging markets are.
According to Wikipedia, an emerging market is one that “has some characteristics of a developed market, but does not fully meet its standards… This includes markets that may become developed markets in the future or were in the past.” In other words, an emerging market is one that's part of a developing nation which is becoming more engaged with the global economy.
Typically, an emerging market is one undergoing a phase of transition from low-income and less developed to more industrial and higher standards of living. As you can probably imagine, there is HUGE opportunity in this space for investments. Emerging markets usually aren't as expensive to invest in as developed markets (lower overall market price and market capitalization), yet have great momentum propelling their economic growth forwards.
Some notable emerging markets are:
- China / Hong Kong
- South Korea
- South Africa
Countries like the United States (the U.S. market) would NOT be considered an emerging market because the US is already very developed as a nation. On the other hand, a country like Croatia is not developed enough to be considered an emerging market, so would fall into the category of frontier markets.
Pros and Cons
Before making any investment, it's important to highlight your personal investment objectives and also to understand the advantages and disadvantages of the investment. Here are some notable pros and cons of the emerging markets.
- Diversification away from US stocks – one of the biggest advantages to investing in emerging markets is that you diversify your money away from the US. This way, if something ever happens to the US, your investment return won't be affected too much.
- Make money off international growth – as mentioned earlier, investing in emerging markets is an awesome way to capitalize on worlwide growth! In recent years the economy has been booming all around the world, and being invested in emerging markets would have let you take advantage of this boom.
- Exchange rate profit – individual investors and institutional investors alike can profit from the US exchange rate. Despite some volatility, past performance of the US dollar suggests that it will continue to remain strong for years to come. When you invest in emerging markets, you can take advantage of this currency exchange.
- Political risk – a big concern with emerging markets is political instability. Emerging markets are typically in countries where laws and policies can change in an instant. A sudden and unexpected change can cause possible loss of principal for you, even if nothing major (policywise) has happened in the past year.
- Exchange rate risk – the flip side of the coin is that exchange rates can HURT you. If you have investments in Brazil, for example, and the Brazilian real suddenly drops a couple basis points, that can negatively impact your capital.
- Transparency – the final big risk relates to accounting and transparency. Investment professionals already struggle with decoding financials for American companies. Just think about how tough it is in countries with developing/growing economies.
5 Best Emerging Market ETFs
If you've reviewed your investing goals and decided that emerging markets are the right play for you, you may be curious about which ones to buy. Here are 5 of the best emerging markets ETFs of 2021.
- Assets Under Management: $81.91B
- Expense Ratio: 0.10%
- Average Daily Volume: 9,512,165
- Total Cumulative Returns (To Date): 105%
- Issuer: Vanguard
The Vanguard FTSE Emerging Markets ETF (VWO) aims to closely track the returns of the FTSE Emerging Markets All Cap China A Inclusion Index. VWO is a high risk, high reward ETF which is great for long term investing. Some of the countries that are included in the index are Brazil, Taiwan, and South Africa.
- Assets Under Management: $30.99B
- Expense Ratio: 0.68%
- Average Daily Volume: 34,752,168
- Total Cumulative Returns (To Date): 363%
- Issuer: iShares
As implied in the name, the underlying index that EEM tracks is the MSCI emerging markets index. This MSCI index is extremely diverse and covers a wide range of companies. Here are some of them: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey, and United Arab Emirates.
- Assets Under Management: $5.97B
- Expense Ratio: 0.11%
- Average Daily Volume: 1,430,200
- Total Cumulative Returns (To Date): 50%
- Issuer: SPDR
Compared to the market caps of other funds, SPEM has a relatively small one. With only 5.9 billion dollars under management, the SPEM fund is a little more careful how they allocate funds. If you buy SPEM, expect to have your money divvied up between Hong Kong, Taiwan, and India markets stocks (the three biggest countries SPEM invests in).
- Assets Under Management: $9.51B
- Expense Ratio: 0.11%
- Average Daily Volume: 1,492,934
- Total Cumulative Returns (To Date): 24%
- Issuer: Schwab
Similar to Vanguard's VWO, SCHE aims to track the FTSE emerging markets index as well. Like its predecessor, SCHE provides an easy way to access large and mid-cap companies in emerging markets. This ETF belongs in a diversified portfolio looking to add exposure to the emerging markets.
- Assets Under Management: $5.06B
- Expense Ratio: 0.59%
- Average Daily Volume: 25,296,498
- Total Cumulative Returns (To Date): 77%
- Issuer: iShares
Unlike the other ETFs on this list, EWZ tracks the performance of a specific country. It just so happens to be that Brazil is an emerging market. Typically speaking, as long as a country belongs to the international monetary fund, there should be an ETF that tracks its economic growth.
Emerging markets offer investors an easy way to diversify away from any one singular country. And, if the choice is between a mutual fund or an index fund, the better investment would be index fund almost every time. Of course, this isn't investment advice and it's important to remember that future results may not mirror those of the last year / or past few years.
Still, if you're looking at emerging markets ETFs, there are a few things to bear in mind. Some of the advantages or pros of emerging markets are:
- Diversification – you don't have all your eggs in one US themed basket.
- International growth – you can capitalize on the rapidly expanding economies all over the world.
- Exchange rate – there's a chance you can take advantage of America's strong currency.
Some considerations are:
- Political instability – whenever you invest in emerging markets, you're putting your money at the mercy of policymakers you may not be too familiar with.
- Exchange rate – though you could make money with the exchange rate, if a drastic currency event happens, you could very easily lose money as well.
- Transparency – some emerging market firms don't have as transparent accounting as firms in more developed countries.
If you DO decide to invest in emerging market ETFs (all things considered), here are 5 of the best:
- Vanguard FTSE Emerging Markets ETF (VWO)
- iShares MSCI Emerging Markets ETF (EEM)
- SPDR Portfolio Emerging Markets ETF (SPEM)
- Schwab Emerging Markets Equity ETF (SCHE)
- iShares MSCI Brazil ETF (EWZ)
As always, do your own research before allocating any money… happy wealth-building!
Joe DiSanto is the founder of Play Louder! He has built multi-million dollar businesses, produced critically acclaimed documentaries and an Emmy-winning TV show, invested millions in real estate, and semi-retired at age 43. Now, Joe serves as a Fractional CFO for several creative firms and is sharing a lifetime of fiscal know-how via Play Louder, an invaluable resource that helps individuals and business owners increase their net worth and plan better for their future.