Zina Kumok writes about financial planning for Wealthsimple. She has eight years investing experience and five years experience as a personal finance writer. Her work has been featured in Investopedia, DailyWorth, MoneyUnder30 and DollarSprout. Zina runs a personal finance blog called ConsciousCoins.com and she has been a two-time finalist for ‘Best Personal Finance Contributor’ at the Plutus Awards. She has a Bachelor's degree in Journalism from Indiana University.
Everyone wants an investment that has a high return, a low amount of risk, and a good dividend yield. Finding that perfect balance can seem impossible, especially if you don’t want to trade individual stocks.
That’s where emerging markets ETFs (exchange-traded funds) come in. These ETFs represent countries often not included in basic index funds. If you don’t invest in emerging markets ETFs, you could be missing out on a huge segment of the international market.
But which emerging markets ETFs should you buy and what are the differences between the most popular options? Read below to see our top picks for emerging markets ETFs.Wealthsimple Invest is an automated way to grow your money like the worlds most sophisticated investors. Get started and we'll build you a personalized investment portfolio in a matter of minutes.
What is an Emerging Markets ETF?
An ETF is an index fund that’s traded on the stock market. That means you can sell an ETF any time of the day. (When you have a mutual fund, you can only sell it once a day.) If you’re an active investor, ETFs give you the ability to trade right after news breaks or when you decide a fund has reached its maximum share price.
“If you aren’t sure where to invest, going for diversity with a low cost emerging index fund is a great place to start,” said David Rae, CFP of DRM Wealth Management.
The benefit of an index fund is that it tracks an index, which means it’s passively managed. Passive funds almost always have lower fees than active funds. Because they track an index, it means they have a huge bundle of securities. This provides more diversification for the investor without a lot of hassle.
An Emerging Markets ETF is an ETF that tracks an index fund related to emerging markets. This refers to countries that aren’t yet first-world countries. According to the Morgan Stanley Capital International Emerging Markets Index, the emerging markets countries include:
Other emerging markets include Turkey, Peru, Argentina, Bangladesh,
“There is also more potential return due to the growth in certain markets, however, it is important to note that this means there could be higher risk as well,” said Deacon Hayes of Well Kept Wallet.
When you buy an emerging markets ETF, it should be in conjunction with a well-balanced portfolio. Owning only emerging markets ETFs can set you up for huge losses because you’re only investing in sector of the market.
It’s hard to say exactly how much of your portfolio should be allocated to emerging markets. Everyone has their own reasons for choosing an emerging markets ETF and which one they like. There is no perfect fund, and every investor needs to decide which ETF fits their portfolio and their needs best.
Popular Emerging Markets ETFs
Want to dip your toes into emerging markets ETFs? Here are our picks. Read about these funds and then decide which fits your portfolio.
SCHE (Charles Schwab)
Investing expert Julie Rains likes this fund because of its low expense ratio (.13%) and because it tracks the Financial Times Stock Exchange (FTSE) Emerging Markets Index. A fund that has low fees means less of an investor’s money will be spent on fees, leaving more room for profit.
SCHE has a dividend yield of 1.92% and includes both large and mid-cap equities. Its share price as of September 2019 was $25.41. It currently has almost $6 billion in assets.
Vanguard’s VWO fund tracks the FTSE Emerging Markets All Cap China A Inclusion Index. Like other Vanguard funds, the VWO fund is known for its low expense ratio of .12%. According to Vanguard, the average expense ratio for similar funds is 1.34%.
This Vanguard fund includes the most popular emerging markets countries as well as countries like Indonesia, Saudi Arabia, and the Philippines. The VWO fund paid a 2.88% dividend yield for 2018.
Rains says she recommends either the SCHE or the VWO.
“If I’m looking to match the Emerging Markets Index itself then I’d stick with Schwab,” she says. “Still, the main holdings are similar.”
This index focuses more on Chinese companies than other emerging markets indices.
“Vanguard mentions 4,000+ common stocks in its VWO portfolio,” Rains says. “The Schwab prospectus references 1,046 stocks as of August 2018. It’s not that I think one is better than the other, just that they look different and the Schwab one may reflect Emerging Markets overall and so could be a better choice for someone who is looking for a purer ETF.”
The First Trust Emerging Markets AlphaDEX® Fund is the top choice from financial advisor Tony Liddle of Prosper Wealth.
“With emerging markets it’s almost impossible to know every company you are investing in, so we feel it is necessary to have quality measures for financial growth and to diversify not only by sector but by country and or part of the world,” he says.
This fund tracks the NASDAQ AlphaDEX® Emerging Markets Index.
He says the FEM has a “self-imposed” limit of 15% in each sector, whereas the VWO and the SCHE funds don’t have those kinds of restrictions. The expense ratio for this fund is .80%, which is higher than the others mentioned on this list.
Liddle also says, “FEM has higher internal costs and has under-performed the last year, but the qualitative and quantitative restrictions should help the fund perform better during economic downturns.”
SPEM (State Street)
This fund tracks the S&P® Emerging BMI Index. It has a gross expense ratio of .11%, which makes it another low-cost option for investors who want to add emerging markets ETFs.
The fund has a projected three to five-year growth of 11.44%. It has a fund dividend yield of 2.35%.
How to Pick an Emerging Markets ETF
Picking an emerging markets ETF on your own can be difficult. There’s no real right or wrong way to pick one. If you already have a Charles Schwab account, adding the SCHE ETF might be easiest. If you have a Vanguard IRA, then the VWO account might be best.
You can also get a recommendation by asking your financial planner or robo advisor. Getting a third-party recommendation can help you pick a fund that fits your portfolio.
Remember, an emerging markets ETF is a high-risk, high-reward product. If you’re about to retire, then this might not be the fit for your portfolio. If you can’t handle the volatility of this type of security, you may want to avoid buying it.
“Investing in the emerging can be difficult,” Rae said. “Often emerging investments are quite volatile. So what has done well in the past, may perform terribly in the future.”
A good compromise may be to only hold a small portion of your portfolio in emerging markets ETFs. That way, you get the benefit when they do well, but you don’t risk losing your life savings if the trade war with China affects the ETF.
You can also buy several emerging markets ETFs if you want a mix of a completely passive fund and a more active fund.Grow your money with low fees and no account minimums. Invest as little as a dollar and we’ll build you a personalized investment portfolio to meet your financial goals.
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