The last decade has seen U.S. markets dominate the investment landscape, but this trend of outperformance is not a constant. A look back at the period from 1999 to 2009 offers a different picture and a sobering lesson for investors heavily weighted toward domestic equities.
During these years, U.S. market returns were almost flat, with an annualized rate of just 1.7%, including dividends. This was a period when even bonds outperformed the stock market, yielding an annualized return of 5.4%. In contrast, the real winners of this decade were emerging market equities, which returned an impressive 13.7% annually.
“The term ’emerging markets’ refers to countries that are in the middle stage of their development, only recently industrialized, or just opened their markets up to foreign investment,” says Brendan Ahern, chief investment officer at KraneShares. “The largest examples include China, India and Brazil, with some other examples being Turkey, Thailand and Indonesia.”
[Sign up for stock news with our Invested newsletter.]
The main benefit of investing in emerging markets is the potential for less correlated returns that can buoy a portfolio when U.S. or developed markets are lagging, along with favorable demographic tailwinds that could lead to higher-than-average future growth.
“A growing global middle-class population within emerging market countries could fuel economic expansion at a multiple of general global GDP growth as long as there is enough support,” says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors.
However, investing directly in emerging market stocks poses challenges, including currency conversion, brokerage limitations and a general lack of familiarity with these markets.
“Oftentimes, emerging markets have less stringent reporting requirements for publicly traded companies, which may make it more difficult for an investor to do thorough research and due diligence,” says Emily Cozad, portfolio manager, research analyst and investment funds specialist at Buckingham Advisors.
That being said, exchange-traded funds, or ETFs, can offer a practical solution to these challenges. They can provide an efficient way to diversify quickly among a variety of emerging countries or to target a specific one.
“For most people, emerging market ETFs present an easy, diversified, low-transaction-cost and low-friction path to invest in emerging market countries using their brokerage account or with the help of a financial advisor,” Schulman says.
Cozad agrees with Schulman, noting: “An ETF is a great way to invest in emerging markets without exposing the investor to the volatility and risks that come with individual stocks.”
Here are seven of the best emerging market ETFs to buy today:
| ETF | Expense ratio |
| iShares Core MSCI Emerging Markets ETF (ticker: IEMG) | 0.09% |
| KraneShares CSI China Internet ETF (KWEB) | 0.69% |
| KraneShares Dynamic Emerging Markets Strategy ETF (KEM) | 0.49% |
| Global X MSCI Argentina ETF (ARGT) | 0.59% |
| Global X MSCI China Consumer Discretionary ETF (CHIQ) | 0.65% |
| Franklin FTSE Taiwan ETF (FLTW) | 0.19% |
| Franklin FTSE India ETF (FLIN) | 0.19% |
iShares Core MSCI Emerging Markets ETF (IEMG)
“When it comes to selecting emerging market ETFs, you should consider whether you want broad exposure to multiple developing economies around the globe, a particular region like Eastern Europe, Latin America or Asia, or a focus on a specific country like China, India or Brazil,” Schulman says. A great example of a broadly diversified emerging market ETF is IEMG.
IEMG tracks the MSCI Emerging Markets Investable Market Index, which provides exposure to over 2,900 stocks. Chinese, Indian and Taiwanese equities have the highest representation at 22.9%, 19.2% and 16.8%, respectively. As part of iShares’ low-cost “core” ETF lineup, IEMG charges a low expense ratio of just 0.09%, or around $9 in annual fees for a $10,000 investment.
KraneShares CSI China Internet ETF (KWEB)
“We believe it is also important for investors to understand that not all emerging markets are created equal,” Ahern says. “In particular, China is unique within emerging markets due to its size as the second-largest economy in the world, and its performance characteristics.” KraneShares’ flagship ETF here is KWEB, which targets China’s most prominent internet related companies for a 0.69% expense ratio.
By tracking the CSI Overseas China Internet Index, KWEB provides exposure to stocks like Alibaba Group Holding Ltd. (BABA), Tencent Holdings Ltd. (OTC: TCEHY) and Baidu Inc. (BIDU). “Going into 2024, we continue to see incremental improvements in China’s consumer confidence, and we believe that KWEB is well positioned relative to other emerging market options from a valuation perspective,” Ahern says.
KraneShares Dynamic Emerging Markets Strategy ETF (KEM)
“As China has differentiated itself from the rest of emerging market countries from a risk and return standpoint, we believe investors should have a dedicated allocation to the country rather than just lumping it into broad emerging markets,” Ahern says. “Thus, we created KEM to dynamically allocate between China and emerging markets other than China based on fundamental and technical signals.”
This ETF strategically balances two other KraneShares ETFs: the KraneShares MSCI All China Index ETF (KALL) and the KraneShares MSCI Emerging Markets ex China Index ETF (KEMX) based on factors like valuation multiples and moving averages. The goal of KEM is to try and outperform its benchmark, the MSCI Emerging Markets Index. KEM charges a 0.49% expense ratio.
Global X MSCI Argentina ETF (ARGT)
“Argentinians voted decisively for change in the most recent presidential election, electing Javier Milei by a near 12% margin,” says Malcolm Dorson, senior portfolio manager and head of emerging markets strategy at Global X ETFs. “His initial measures, which include steps towards currency liberalization, labor reforms and privatization of state-owned enterprises have been widely applauded by the market.”
Investors who believe Milei’s election will be a positive tailwind for the Argentinian economy over the long term can use ARGT to make a country-specific bet for a 0.59% expense ratio. “We continue to recognize the long-term economic potential for Argentina, highlighting the vast and green-positioned natural resource base, its educated population and low credit penetration,” Dorson says.
Global X MSCI China Consumer Discretionary ETF (CHIQ)
“Though China may face uncertainties in terms of a U.S. election cycle and hawkish rhetoric from all parties, valuations appear discounted, and fundamentals look to be improving,” Dorson says. “With the market now being down for three consecutive years and the government’s consistent incremental stimulus, we see room for a bounce.” Investors bullish on China’s resurgence can buy CHIQ.
“CHIQ is the only U.S. ETF offering direct and absolute exposure to the MSCI China Consumer Discretionary Index,” Dorson says. This provides the ETF with exposure to leading Chinese automotive manufacturers, internet companies, travel firms and athletic apparel retailers. The ETF charges a 0.65% expense ratio and has attracted just over $228 million in assets under management, or AUM.
Franklin FTSE Taiwan ETF (FLTW)
“Taiwan’s economy is export-driven and closely tied to the cyclical fortunes of semiconductor companies,” says Dina Ting, senior vice president and head of global index portfolio management at Franklin Templeton. A notable contender here is Taiwan Semiconductor Manufacturing Co. Ltd. (TSM), which has seen strong demand globally thanks to the current artificial intelligence, or AI, trend.
For exposure to TSM alongside 118 other holdings, investors can buy FLTW. This ETF passively tracks the FTSE Taiwan Capped Index for a 0.19% expense ratio, which is fairly affordable for a single-country ETF. However, investors should be aware of concentration risk. Because the index is market-cap weighted, TSM’s large market cap currently represents about 20% of the ETF’s total weight.
Franklin FTSE India ETF (FLIN)
“India is currently Asia’s third-largest economy, and its population growth is projected to soon outpace that of China,” Ting says. “It poses interesting growth opportunities for investors as the country is positioned to benefit from favorable demographics, rising incomes and a growing middle class.” To access Indian equities, investors can buy FLIN, which like FLTW also charges a reasonable 0.19% fee.
Currently, FLIN tracks 215 stocks represented by the FTSE India Capped Index. The Indian market is fairly heavy in financial and technology sector stocks, with names like HDFC Bank Ltd. (HDB), Infosys Ltd. (INFY) and Tata Consultancy Services Ltd. (TCS.NS) among this ETF’s top holdings. However, investors should note that FLIN pays dividends semi-annually, not quarterly.
[See: 7 Best ETFs to Buy Now.]
More from U.S. News
7 of the Best Growth Funds to Buy and Hold
7 Best Emerging Market ETFs originally appeared on usnews.com
Update 01/19/24: This story was published at an earlier date and has been updated with new information.
