7 Best Emerging-Market ETFs

Emerging markets offer a great way to diversify and tap into high growth.

Most U.S. investors hold a high allocation to domestic equities as a “home-country bias,” which helps lower currency risk and improve tax efficiency. However, diversifying internationally can be a good idea. Aside from developed markets like Europe, the U.K., Canada, Australia and Japan, developing geographies like China, Russia, India, Africa and South America can offer some enticing opportunities. The economies of these countries are called “emerging markets” and are characterized by fast-rising economic growth. Historically, emerging markets have outperformed when U.S. markets faltered. Case in point, from 2000 to 2007 the returns of emerging markets were double that of U.S. markets each year, returning an annualized 15% versus 2.3%. A diversified way of accessing emerging-market stocks without exchanging currency or using American depositary receipts is via an exchange-traded fund, or ETF. Here are the seven best emerging-market ETFs to buy in 2022.

iShares MSCI Emerging Markets ETF (ticker: EEM)

EEM offers passive exposure to large- and mid-cap emerging-market stocks. The ETF tracks the MSCI Emerging Markets Index, which holds over 800 stocks from places like China, India, Taiwan, South Korea, Brazil, Saudi Arabia, Mexico and elsewhere. Most of the ETF is concentrated in financial sector stocks, with information technology and consumer discretionary coming in second and third. Top holdings include Taiwan Semiconductor Manufacturing Co. Ltd. (2330), Tencent Holdings Ltd. (0700), Samsung Electronics Ltd. (005930) and Alibaba Group Holding Ltd. (9988). The ETF hasn’t had the best performance over the last decade, posting a 10-year annualized return of 0.37%. However, its return since inception from 2003 is much better at an annualized 7.93%. EEM costs an expense ratio of 0.68%, which works out to $68 annually per $10,000 invested.

iShares Core MSCI Emerging Markets ETF (IEMG)

Long-term buy-and-hold investors looking for an affordable emerging-markets ETF might not like EEM given its somewhat high expense ratio. To remedy this, iShares released IEMG, a low-cost offering among its “core” ETF lineup. This ETF is similar to EEM but includes small-cap stocks that EEM excluded because it tracks the slightly different MSCI Emerging Markets Investable Market Index. Overall underlying holdings, geographies and sector exposures remain similar, making IEMG the better pick unless you’re day- or swing-trading EEM and require greater volume and liquidity. IEMG costs a much lower expense ratio of 0.09%, or about $9 annually per $10,000 invested.

Vanguard FTSE Emerging Markets ETF (VWO)

Vanguard is known for its lineup of low-cost, broad-market index ETFs, and VWO is no exception. This ETF tracks the FTSE Emerging Markets All Cap China A Inclusion Index. In terms of geographical representation, VWO is very similar to EEM and IEMG, with places like China, India, Taiwan, Brazil, Saudi Arabia and South Africa receiving the highest weightings. The notable difference here is the absence of South Korea, as FTSE allocates the country to its international developed-market indexes instead. Otherwise, the top holdings are similar, with Taiwan Semiconductor Manufacturing, Tencent Holdings and Alibaba Group among them. VWO costs a low expense ratio of 0.08% and could be an excellent tax-loss harvesting partner for IEMG given they track different indexes but have similar holdings.

Vanguard Emerging Markets Government Bond ETF (VWOB)

The recent turmoil in U.K. government bonds, called gilts, underscores the potential need for geographical diversification when it comes to fixed-income holdings. Although U.S. government Treasury bonds are considered as solid as it gets, there are still risks. In the unlikely event that the U.S. government defaults on its debts, or if interest rates rise too fast, U.S. Treasurys could be dealt a sharp shock. A good diversifier here are government bonds from emerging markets, with VWOB being a great way of accessing them for a 0.2% expense ratio. The higher risk of emerging-market bonds gives VWOB a current yield to maturity of 8.2%, which is almost as high as some domestic high-yield bonds.

iShares MSCI Emerging Markets Min Vol Factor ETF (EEMV)

An oft-cited rule of thumb in investing is “more risk equals more returns.” This is true up to a point, but there is one contradiction: the low-volatility anomaly. Simply put, low-volatility stocks have historically outperformed the market. These are companies with a lower-than-average standard deviation and beta, a measure of sensitivity relative to the overall market. EEMV applies this strategy to stocks in emerging markets as a way to manage risk and decrease drawdowns during market downturns. Therefore, EEMV is not a purely passive index ETF, but rather a “factor” or “smart beta” ETF. It charges a higher expense ratio than its vanilla counterpart IEMG at 0.25%.

WisdomTree Emerging Markets Small Cap Dividend Fund (DGS)

Small-cap stocks are companies that trade with a market capitalization of $300 million to $2 billion. Research from Nobel Prize laureates Eugene Fama and Kenneth French identified that the size of a stock had a large role in explaining its excess returns, or alpha, compared to a benchmark. Specifically, they pinpointed the “size” risk factor, showing that smaller stocks, in aggregate, historically outperformed larger ones. A great way to target small-cap stocks from emerging markets is via DGS, which also screens for a history of strong dividend growth. This can help ensure only profitable and quality companies are held, which is critical when investing in small caps. DGS costs an expense ratio of 0.58%.

Avantis Emerging Markets Value ETF (AVES)

Value investors attempt to pick stocks that appear to be trading at a price lower than what their fundamentals suggest. As with the size risk factor, the historically higher returns of value stocks compared to their benchmark was also discovered by Fama and French to be a source of alpha. This is expressed by the “value” risk factor, as shown by the historical outperformance of stocks with lower price-earnings, price-book and price-sales ratios. A great way to target value stocks from emerging markets without the need for extensive research is via AVES. This ETF does not passively track an index. Rather, it employs quasi-active management via a quantitative, rules-based screener. AVES costs an expense ratio of 0.36%.

7 best emerging-market ETFs:

— iShares MSCI Emerging Markets ETF (EEM)

— iShares Core MSCI Emerging Markets ETF (IEMG)

— Vanguard FTSE Emerging Markets ETF (VWO)

— Vanguard Emerging Markets Government Bond ETF (VWOB)

— iShares MSCI Emerging Markets Min Vol Factor ETF (EEMV)

— WisdomTree Emerging Markets Small Cap Dividend Fund (DGS)

— Avantis Emerging Markets Value ETF (AVES)

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