10 Best Emerging Markets ETFs for a Global Rebound
Emerging markets ETFs can inject growth into your portfolio, as well as provide some much-needed diversification. Here are 10 top EM funds.
U.S. stocks' performance in recent years has led investors to forget about emerging markets ETFs despite the fact China has not so quietly become the second-largest economy in the world.
In 2020, the International Monetary Fund (IMF) believes China's economy will grow by 1% despite COVID-19, while the U.S. will see an 8% decline. In 2021, the IMF expects China's economy to grow by 8.2%. Emerging markets as a whole are projected to see 5.9% economic growth in 2021.
The beauty of emerging markets stocks is they often outperform during periods of U.S. underperformance, making emerging market ETFs a perfect complement to your plain-vanilla S&P 500 index fund.
According to Manulife Securities adviser Sonny Wadera, the last time U.S. stocks took emerging markets to the woodshed was the decade between 1990 and 1999, when U.S. stocks delivered an annual return of 20.38% – more than 700 basis points greater than emerging markets stocks.
However, in the next 10-year period between 2000 and 2009, U.S. stocks lost 33.75% on a cumulative basis while emerging markets stocks gained 89.22%.
In other words, sometimes it really does pay to diversify across the world.
Here are 10 of the best emerging markets ETFs to ride a global economic rebound. If you're like most American investors, you've probably got some home-country bias. These exchange-traded funds will ensure you don't miss out on the non-correlated performance of emerging markets.
Data is as of July 13. Yields represent the trailing 12-month yield, which is a standard measure for equity funds.
Vanguard FTSE Emerging Markets ETF
- Assets under management: $60.0 billion
- Expenses: 0.10%
- Dividend yield: 3.3%
The Vanguard FTSE Emerging Markets ETF (VWO, $42.87) is the largest U.S. listed emerging markets ETF with a cool $60 billion in total assets. Vanguard's scale allows it to provide some of the lowest costs in the game. And that's the case with VWO, which charges just 0.10% in management fees, or $1 per every $1,000 invested in the fund.
You can't even get a chocolate bar for a buck these days.
VWO tracks the performance of the FTSE Emerging Markets All Cap China Class A Inclusion Index, a market-cap-weighted index that invests in the emerging markets across all market caps including large-, mid- and small-cap stocks. As the index name indicates, it not only invests in Chinese stocks headquartered in Hong Kong, but also "A Class" shares for companies listed in Shenzhen and Shanghai.
The ETF currently boasts more than 5,000 stocks from more than 25 different countries, including the likes of e-commerce firm Alibaba Group (BABA), internet titan Tencent Holdings (TCEHY) and chipmaker Taiwan Semiconductor (TSM). China has the most representation at 42% of the fund, followed by Taiwan at 15.4% and India at 9.4%.
The median market cap of a VWO holding is $19 billion, and annual turnover is just 8.9%. That means you're getting a wide basket of stocks that lean toward the large side, with a mostly buy-and-hold mentality. It's also a growthy group of stocks, with estimates for annual earnings-per-share growth averaging 14.1%. By comparison, the SPDR S&P 500 ETF Trust (SPY), which has a weighted average market cap of $385 billion, has an annual estimated EPS growth rate of just 10.2%.
The currency risks of an emerging markets ETF are considerably higher than an S&P 500 tracker. But additional growth justifies at least a small portion of your assets if you're a risk-averse investor.
iShares JPMorgan USD Emerging Markets Bond ETF
- Assets under management: $14.9 billion
- Expenses: 0.39%
- SEC yield: 4.4%*
Tristan Sones – co-head of fixed income at AGF Investments, a large Canadian mutual fund and ETF company – suggested in a mid-June article in the Globe and Mail that fixed-income opportunities in frontier markets might be the best opportunity during COVID-19. Why? Because the yields on developed markets are falling to levels never seen before.
While U.S. investors can't dip their toes into frontier markets bonds via ETFs, they can tap the next best place – emerging markets bonds – via the iShares JPMorgan USD Emerging Markets Bond ETF (EMB, $109.54).
EMB gives investors access to U.S.-dollar denominated debt in roughly 30 emerging markets for a mere 0.39% fee. The top three countries at the moment are Mexico (5.3%), Indonesia (5.0%) and Saudi Arabia (4.7%), while even the lowest weighting – Poland – is at more than 1% of assets. That's strong geographic diversification.
The iShares JPMorgan USD Emerging Markets Bond ETF offers 4.4% in yield at the moment. The weighted average coupon of the 534 bonds held is nearly 5%, while the weighted average maturity is 13.3 years. More than half of the portfolio (58%) carries an investment-grade rating.
* SEC yields reflect the interest earned after deducting fund expenses for the most recent 30-day period and are a standard measure for bond and preferred-stock funds.
SPDR Portfolio Emerging Markets ETF
- Assets under management: $4.3 billion
- Expenses: 0.11%
- Dividend yield: 3.1%
The SPDR Portfolio Emerging Markets ETF (SPEM, $35.91) is one of State Street's 22 ETF "building blocks." These funds are meant to provide investors with a low-cost core: the foundational pieces of a well-constructed portfolio.
Of the 11 portfolio building blocks in the equity category, SPEM is one of four international equity ETFs, and the only emerging markets fund. And a fee of just 0.11% to gain exposure to nearly 2,300 stocks in 30 different EMs is a bargain.
The ETF tracks the performance of the S&P Emerging BMI (Broad Market Index), which is a subset of the S&P Global BMI. The index is market-cap weighted and float-adjusted, which means representation in the fund is determined by the company's size, but only those shares available to the public are included in the index's calculation.
SPEM's top 10 holdings account for a decent 23% of the ETFs portfolio. The top three sectors by weight are financials (21.1%), Consumer Discretionary (17.6%), and technology (13.5%). Communication services is a close fourth at 12.3%.
Geographically, like most of the emerging markets ETFs, the top three country allocations are China (43.1%), Taiwan (14.2%) and India (11.9%).
As for the holdings themselves? The weighted average market cap is $66.4 billion, with the largest checking in at $425.0 billion. This isn't a place for small fries. But SPEM is pretty spry, with a 12.5% estimate for average annual EPS growth over the next three to five years.
iShares ESG MSCI EM ETF
- Assets under management: $3.4 billion
- Expenses: 0.25%
- Dividend yield: 2.8%
If you're interested in the increasingly popular world of environmental, social and corporate governance (ESG) investing, you might consider ESG funds.
The iShares ESG MSCI EM ETF (ESGE, $34.62), which tracks the performance of the MSCI Emerging Markets Extended ESG Focus Index, allows you to invest in roughly 350 mid- and large-cap stocks across 12 different EMs. They also exhibit positive ESG characteristics, whether that's low carbon footprint, charitable actions or diverse corporate boards.
ESG investing has become so popular with investors that BlackRock, which expects sustainable and ESG investments to hit $1.2 trillion in assets by 2029, has an entire section of its website dedicated to ESG and sustainable investing.
Funds such as ESGE will help the industry get there faster.
Top countries aren't anything out of the ordinary: China is tops at 41.3% of assets, followed by Taiwan (12.5%), South Korea (11.2%) and India (8.2%). The top three sectors are financials (21.4%), technology (18.3%) and consumer discretionary (18.1%).
The ETF is decently concentrated at the top, with top 10 holdings – including China's Alibaba and Tencent – commanding almost 30% of assets. The best part about the iShares ESG MSCI EM ETF is that it gives you many of the same stocks held by the iShares MSCI Emerging Markets ETF (EEM) for 43 fewer basis points in expenses, and you get an ESG overlay.
Schwab Fundamental Emerging Markets Large Company Index ETF
- Assets under management: $3.1 billion
- Expenses: 0.39%
- Dividend yield: 4.3%
The Schwab Fundamental Emerging Markets Large Company Index ETF (FNDE, $24.53) specifically homes in on EMs' biggest companies.
The FNDE tracks the performance of the Russell RAFI Emerging Markets Large Company Index, which selects a group of large-cap stocks from the emerging markets segment of the FTSE Global Total Cap Index, using a rating system that evaluates companies based on fundamental measures such as adjusted sales, retained operating cash flow, and dividends plus buybacks. The top 87.5% of companies, based on their fundamental score, are included in the index.
The weighted average market cap of the ETFs 362 holdings is $72.7 billion. Broken down by size, companies larger than $70 billion account for nearly a quarter of the portfolio, another 66% is invested in companies between $3 billion and $70 billion, and the remainder is in stocks smaller than $3 billion.
FNDE turns over the entire portfolio ever five years. Geographically speaking, China is tops, but at nearly 35% of the fund (a little less than other ESG funds), Taiwan is nearly 20% and Russia comprises 12.1% of assets. Financials (26.7%), energy (19.4%) and information technology (16.2%) are tops, with stocks like Taiwan Semiconductor and China Construction Bank leading the way.
Finally, if income is your thing, the fund yields well more than 4%.
WisdomTree Emerging Markets ex-State-Owned Enterprises Fund
- Assets under management: $1.5 billion
- Expenses: 0.32%
- Dividend yield: 2.0%
For those investors who don't like to own state-owned enterprises, which abound in places such as China, the WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (XSOE, $32.11) is the ETF for you.
XSOE, which tracks the WisdomTree Emerging Markets ex-State-Owned Enterprises Index, will not invest in any EM stock that has government ownership of more than 20%. This index is one of three WisdomTree indices specifically designed to exclude state-owned enterprises; the other two are focused on China and India exclusively.
So … why avoid state ownership?
WisdomTree's research shows that over the past 10 years. Non-state-owned enterprises in emerging markets generated an annual return of 2.09%, which is 381 basis points greater than state-owned enterprises.
This cap-weighted, float-adjusted portfolio of stocks is reconstituted annually after the close of trading on the third Friday in October. Each component's weighting is calculated by multiplying its market cap by the Standard and Poor's Investability Weighting Factor. The same calculation is repeated for each component. All of the components' scores are added together. Each stock's score is then divided into the total, providing a weighting for each individual company.
The top three sectors by weight are consumer discretionary (22.5%), technology (18.3%), and communication services (16.1%). Tencent and Alibaba alone make up roughly 18% of the portfolio.
The 664-stock XSOE charges a very reasonable 0.32%, which is why it has managed to gather $1.5 billion in assets in less than six years.
SPDR S&P Emerging Markets Small Cap ETF
- Assets under management: $520.5 million
- Expenses: 0.65%
- Dividend yield: 2.9%
As its name suggests, the SPDR S&P Emerging Markets Small Cap ETF (EWX, $43.57) invests in small-cap stocks with market caps between $100 million and $2 billion.
This float-adjusted, market cap-weighted index includes all small-cap stocks from the S&P Global BMI that fit the market size requirements and have sufficient liquidity. The weighted average market cap of the 1,800-plus holdings is $1.2 billion.
Because EWX is a small-cap ETF, the holdings have a much higher earnings growth rate estimate, at 16.6% annually over the next three to five years.
Taiwan is actually the best-represented country at nearly a third of holdings, followed by China at about 22%, and India at 10%. And unlike many larger EM ETFs, financials aren't a big part of EWX, at just 8% of assets. Instead, the fund is dominated by information technology stocks (21.2%), consumer discretionary (13.5%) and industrials (13.0%).
The only downside of this fund is a 0.65% expense ratio that's costlier than most of the emerging markets ETFs on this list, though that's still a fair price for this kind of exposure.
Columbia Emerging Markets Consumer ETF
- Assets under management: $169.0 million
- Expenses: 0.59%
- Dividend yield: 1.7%
Consumers should begin to reopen their wallets once COVID-19 begins to dissipate – not just here in the U.S., but in emerging markets. You can position yourself for that eventuality with the Columbia Emerging Markets Consumer ETF (ECON, $24.31), which identifies consumer discretionary, consumer staples and communication services companies in emerging markets that are expected to grow as their middle-class populations grow.
The ETF tracks the performance of the Dow Jones Emerging Markets Consumer Titans Index, a tight collection of roughly 60 EM companies in the three aforementioned sectors. The top holding is Meituan Dianping, which offers group buying discounts similar to Groupon (GRPN), as well as consumer reviews, a la Yelp (YELP). It also holds familiar names such as Tencent, Alibaba and JD.com (JD). The top 10 holdings account for a heavy 45% of assets.
In terms of style, ECON is considered a large-cap blend, with a weighted average market cap of $82.8 billion. It does offer a dividend, albeit a modest one.
China really throws around its heft at 51% of assets, followed by India (12.0%) and Taiwan (11.3%). Communications services are tops at 38% of the fund, followed closely by consumer discretionary (37%) and the rest in staples – an excellent mix of offense and defense.
At 0.59%, ECON isn't overly expensive. But compared to VWO or SPEM, it isn't cheap, either.
Emerging Markets Internet & Ecommerce ETF
- Assets under management: $833.1 million
- Expenses: 0.86%
- Dividend yield: 1.0%
The investment case for e-commerce stocks was made long before COVID-19 reared its ugly head. Pair that with the growth potential of emerging markets, and you really have something special.
Enter the Emerging Markets Internet & Ecommerce ETF (EMQQ, $50.57), which has received even more spotlight thanks to the COVID effect on internet spending.
EMQQ's performance since its launch in November 2014 has been off-the-charts good, justifying its 0.86% management expense ratio. EMQQ has roughly doubled on a total-return basis (price plus dividends) since then.
According to EMQQ, consumption in emerging markets will swell to $30 trillion by 2025, with more than 50% of the estimated 7.9 billion people in what it describes as the "consuming class."
Exchange Traded Concepts, the people behind EMQQ, also make a good case why you should have emerging markets in your portfolio, pointing out that 25% of the world's total market cap is emerging markets, as is 45% of the world's GDP. Not to mention, most of the world's population lives in EMs.
To be included in the EMQQ Index, a company must generate at least 50% of its revenue from the internet or e-commerce industries in both emerging and frontier markets. It is rebalanced twice a year on the third Friday in June and December.
The fund currently holds 83 stocks from 13 countries, with China the overwhelming presence at 60% of assets, followed by South Korea and South Africa at 8.7% and 7.8%, respectively. Top stocks – which include Tencent, Alibaba and Meituan – account for almost 60% of total assets.
KraneShares CSI China Internet ETF
- Assets under management: $2.7 billion
- Expenses: 0.76%
- Dividend yield: 0.1%
The KraneShares CSI China Internet ETF (KWEB, $68.03) holdings are 100%, China-based publicly traded companies that engage in internet-related businesses. If you're not comfortable holding an emerging markets ETF that's exclusively concentrated in one country – China or otherwise – this fund is definitely not for you.
KWEB tracks the performance of the CSI Overseas China Internet Index, a collection of companies that are traded on the Hong Kong, New York and NASDAQ stock exchanges. The ETF currently has 48 holdings, and the top 10 account for nearly 60% of assets. American investors are likely familiar with most, if not all, of the top 10, which includes most of the names we've mentioned already.
KWEB is extremely concentrated from a sector perspective: 60% in tech, 34% in consumer discretionary and the small remainder in industrials. Large caps are a quarter of the portfolio, with another 21% in mid-caps and the rest in small companies.
Like EMQQ, KWEB, which got its start in July 2013, has done extremely well since inception, rocketing 176% higher.