Diversification is a word you must know to succeed as an investor. And, one of the best ways to capitalize on a world of market opportunities is through the best emerging market ETF you can find.
Emerging-market exchange-traded funds allow investors to put their money into stocks, bonds, and commodities with growth potential in still-developing geographies around the globe.
Here's how they work: You buy and trade shares of ETFs just like you would stock in a company. The best emerging market ETF allows investors to earn money from far-off opportunities that may be difficult for the average person to access and understand.
While nothing in investing is foolproof, ETFs are attractive since they are created by financial professionals with a clear benchmark to judge their performance.
Looking to get a return from companies you may never know existed? The best emerging market ETF could well help pad your portfolio.
What Is an ETF?
Exchange-traded funds are a unique hybrid style of investment security that shares characteristics of both stocks and mutual funds.
As the name suggests, ETFs are traded openly by investors on various exchanges. The purpose, of course, is to get a healthy return.
ETFs essentially offer built-in diversification in a single share. They consist of a collection of individual assets, which could be stocks, bonds, or commodities.
The assets are carefully selected and packaged with one specific goal: to match or exceed the returns of a benchmark index. It’s a way of letting investors own everything in an index without having to buy everything in the index.
ETFs are a relatively new investment vehicle, having first come on the scene in the early 1990s, according to Fidelity Investments.
Depending on who is doing the estimating, investors can now choose from as many as 2,500 ETFs with anywhere from $2 trillion to $3 trillion invested worldwide. The ETFs are built around a unifying theme -- a region, an industry, a commodity, or even bonds.
Generally speaking, ETFs have a lower fee structure and certain tax advantages. But you’ll still pay commissions, and may face other drawbacks such as liquidity challenges.
What Is an Emerging Market?
Among investment advisors, emerging markets are talked about in reverential tones as they are places where companies and markets are just emerging. They come with a lot of risks. But with risk also comes the potential for high rewards.
Emerging market funds seek to uncover tomorrow’s big hit investments today. They are typically located in areas that are just coming into their own in terms of spending power.
Emerging markets come and go with the business cycle. But as an example, Morgan Stanley’s emerging markets fund consists of assets from Central and South America, Europe, the Middle East, Asia, and other regions.
Different investors define emerging markets in different ways. But in general, according to this article from The Balance, emerging markets have below-average incomes, slow growth, high volatility, and potential -- lots and lots of potential.
Determining the Best Emerging Market ETF
Unfortunately, you can’t just look at the best-performing ETFs and choose the one with the highest percentage return. Because as a savvy investor, you know that past performance is no guarantee of future results.
So that means you should understand several key metrics before issuing that buy order. Consult with your investment advisor as well.
Start by looking at the expense ratio. As we indicated earlier, ETFs typically have lower overhead. Some even charge $0, according to ETFdb.com, which follows and analyzes the ETF industry.
Make sure you have an understanding of how the fund managers go about deciding on the pieces of their ETF. They may have different strategies for which securities to pick and in which quantities, to mimic the index.
Next, consider the size of the underlying asset base. As ETFdb.com says, “More isn’t necessarily better.” With more individual securities and other assets filling up an ETF, there’s more that can go wrong.
In considering an ETF, it won’t be long before you come across the notion of “tracking error.” An exchange-traded fund is not a carbon copy of the index. It typically chooses a small fractional sample in order to provide the same results as the index. Sometimes it works, and sometimes it doesn’t. You want a fund with the smallest possible tracking error.
Lastly, as in any investment, you also want to understand the tax implications. This is a fairly technical matter, and it might be smart to consult a tax professional, so you’re not surprised come Tax Day.
The 5 Best Emerging Market ETFs
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With these variables in mind, you’re now ready to look at the market and pick out what you believe to be the best emerging market ETF.
One word of caution before you do, emerging markets can be confusing with lots of volatility. Look closely at the fundamentals, but also consult your investment and tax advisor before choosing.
A quick word on our methodology: We selected these ETFs based on a review of ETF rankings from numerous investment publications. In our review, we looked at best-of lists from Forbes, Morningstar, Nasdaq, Morningstar, ETF.com, and others.
Those funds that were in the top echelon in multiple reviews are the ones that made our list.
1. Schwab Emerging Markets Equity ETF
The Schwab Emerging Markets Equity fund (Ticker symbol: SCHE) opens our search for the best emerging market ETF. The fund has about $6 billion under management. Morningstar believes it fairly inexpensive to purchase among emerging market ETFs.
Currently holding more than 800 individual assets, the fund is made up of securities principally from securities in Hong Kong, Taiwan, and India. Alibaba Group Holdings and Taiwan Semiconductor are the largest individual holdings.
Schwab’s Emerging Market Equity Fund has returned 2 percent to investors over five years and 8 percent over three years, according to ETF.com.
SCHE’s largest market sectors are in financials, technology, and energy. The fund has a low tracking error, so no need to worry about divergences from the benchmark.
Trading costs are also low, making it a real contender for best emerging-market ETF.
2. SPDR Portfolio Emerging Markets
The Emerging Markets ETF from SPDR (ticker symbol: SPEM) contrasts with other total market ETFs in a couple of significant ways.
The fund includes stocks, bonds, and other assets from South Korea. The Schwab and Vanguard funds on our list do not. Other than that, all the total market funds on our list draw primarily from the Asian basin, include Hong Kong, Taiwan, China, and India.
In total, SPEM holds about 1,500 assets, with about $2.7 billion under management. That's in contrast to the Schwab fund, which is about half the size.
Top sectors currently include financials, technology, and energy. Top holdings include Tencent Holdings, Alibaba Group, and Taiwan Semiconductor.
SPEM has generated returns of about 5 percent over the past decade, and around 8 percent over three years.
3. Vanguard FTSE Emerging Markets
The Vanguard FTSE Emerging Markets ETF (ticker symbol: VWO) may be the largest emerging-market ETF fund in the world. It has more than $64 billion in assets under management.
The fund holds shares of about 4,100 companies, drawn primarily from Asia but also from many other countries.
Among those 4,100 companies, financial and technology stocks make up the fund’s two largest sectors. Worthy of note is the fund's top stock. It is Tencent Holdings Ltd., a Chinese technology company.
VWO has provided a return of about 4 percent over the past decade, and 7 percent over the past three years, according to ETF.com, which also studies ETFs.
SCHE’s largest market sectors are in financials, technology, and energy. It has a low tracking error; consequently, you can expect this fund to track its benchmark very closely.
4. Franklin FTSE Russia ETF
Emerging market ETFs are not always built horizontally across different regions. In contrast, some go deep within a single country. One example is the Franklin FTSE Russia ETF (ticker symbol: FLRU.)
The Franklin fund consists of a sampling of large- and medium-capitalization stocks in Russia. The fund was formed fairly recently. As a result, it has only about $15 million under management. In its early days, the Franklin FTSE has outperformed its benchmark index.
Stocks in FLRU come from the energy sector, mainly, as well as financials, basic materials, and utilities. Leading holdings include Gazprom, Lukoil, and Sberbank.
5. iShares MSCI Brazil Small-Cap ETF
The final candidate for best emerging market ETF is also one that goes deep into a specific region but in another part of the world.
The fund we're thinking of is the iShares MSCI Brazil Small-Cap ETF (ticker symbol: EWZS.) It consists of Brazilian small-cap stocks. With about $100 million in assets under management, EWZS focuses on stocks from utilities, financials, and consumer cyclical stocks. The top holdings include Azul SA, YDUQS Participacoes S.A., and TOTVS S.A.
EWZS has more than kept pace with its benchmark index, the MSCI Brazil Small Cap Index. As a result, the fund is up 40 percent over the past year, 23 percent over three years, and about 3 percent the past five years.
ETF.com does feel the fund is a little pricey to trade for retail and institutional investors.
Gaining an Investing Edge
What’s the best emerging-market ETF? As we’ve shown, that’s a difficult question to answer. Only you and your investment and tax advisor can know for sure, based on your tolerance for risk and investment timeline.
What we can say is that ETFs have grown to become extremely popular and offer distinct advantages over standard mutual funds or U.S. equities. As a result, they are worth considering in your portfolio.
If this seems like a confusing subject, you can explore ETFs in books such as "Step by Step Emerging Markets Investing: A Beginner's Guide to the Best Investments in Emerging Markets," by financial advisor Joseph Hogue. Also consider purchasing "Investing in ETFs For Dummies," by Russell Wild. These will help you in your quest to identify the best emerging market ETF.
Above all, study the charts. Know what you’re looking for and where. And we’re certain you’ll find the best emerging market ETF to fit your needs.
Do you have something you'd like to share about the best emerging market ETFs? Let us know in the comments section.