Emerging markets are countries that are often characterized by rapid economic growth and are transitioning from developing to developed countries. These countries typically have lower per capita incomes than developed countries, but they have economic potential.
BRICS is an acronym for some of the major emerging market countries such as Brazil, Russia, India, China, and South Africa, but other countries such as Mexico, Indonesia, South Korea, Turkey, and Taiwan are also heavily involved.
Rapid industrialization and a growing middle class have made emerging markets an avenue for global investors seeking higher returns. Exchange-traded funds (ETFs) are a popular way to access this potential.
What is an Emerging Markets ETF?
Emerging Markets ETFs are a type of investment vehicle that track the performance of a basket of stocks in developing countries. ETFs trade on stock exchanges like individual stocks, but they offer a more diverse investment approach.
The benefits of investing in emerging markets ETFs include:
Diversification: ETFs provide instant diversification across a wide range of emerging market stocks, reducing the risk associated with investing in a single company or country. Exposure to growth opportunities: Emerging markets are home to rapidly expanding companies and industries, offering potential opportunities to participate in growth.
Emerging market countries often enjoy rapid GDP growth, but this does not always translate into rapid stock price appreciation. Many emerging market ETFs, including some on this list, have underperformed the S&P 500 over the past five years due to a variety of factors, including political instability, economic fluctuations, and currency fluctuations.
Top 7 emerging market ETFs
If you’re considering investing in emerging markets but don’t know much about international investing, or just don’t want to cherry-pick individual stocks, emerging market ETFs are a useful starting point.
Bankrate selected these top-performing funds based on the following criteria:
U.S. Funds in ETF.com’s Emerging Markets Screener Top Performing Funds Over the Past 5 Years Performance Measured as of September 26, 2024 Using Latest Numbers No Inverse or Leveraged ETFs
iShares MSCI Emerging Markets Small Cap ETF (EEMS)
This ETF from iShares tracks the investment results of an index comprised of smaller publicly traded companies from emerging market countries. The fund’s top countries include India, Taiwan, and South Korea. The top three sectors are industrials, information technology, and consumer goods.
2024 first year results: 11.4% Past results (annual for 5 years): 11.1% Expense ratio: 0.7%
Freedom 100 Emerging Markets ETF (FRDM)
This ETF seeks to track the total return performance of the Life + Liberty Freedom 100 Emerging Markets Index. The index invests in companies located in countries with high scores for personal and economic freedom, the fund manager said. Taiwan, Chile and South Korea are among the most heavily weighted countries.
2024 first year results: 14.8% Past results (annual for 5 years): 10.2% Expense ratio: 0.49%
Cambria Emerging Shareholder Yield ETF (EYLD)
This actively managed ETF tracks emerging market companies that return cash to shareholders through dividends, share buybacks, and net debt reduction. As of August 1, 2024, the Fund has significant investment exposure to companies in the information technology, financial and energy sectors. Top countries include Taiwan, China, and South Korea.
2024 first year results: 16.2% Past results (annual for 5 years): 9.1% Expense ratio: 0.63%
CraneShares MSCI Emerging Markets (ex China) ETF (KEMX)
The fund is benchmarked to the MSCI Emerging Markets Index (ex-China), which tracks large- and mid-cap stocks in emerging market countries, excluding China.
2024 first year results: 12.9% Past results (annual for 5 years): 9% Expense ratio: 0.24%
SPDR S&P Emerging Markets Dividend ETF (EDIV)
The fund tracks the performance of the S&P® Emerging Markets Dividend Opportunities Index. The fund provides exposure to 100 emerging market stocks that pass stability tests and offer the highest risk-adjusted dividend yields. The index is weighted based on a stock’s trailing 12-month dividend yield. Finally, no single country or sector can represent more than 25 percent of the fund, and no single stock can have a position size of more than 3 percent.
2024 first year results: 21.9% Past results (annual for 5 years): 8.5% Expense ratio: 0.49%
VictoryShares Emerging Markets Value Momentum ETF (UEVM)
The fund tracks the performance of the Nasdaq Victory Emerging Markets Value Momentum Index and provides exposure to value and momentum factors. It aims to balance the overall risk of the fund by giving greater weight to stocks with lower realized volatility.
2024 first year results: 18.5% Past results (annual for 5 years): 7.7% Expense ratio: 0.45%
Schwab Fundamental Emerging Markets Equity ETF (FNDE)
This ETF tracks the total return of an index that measures the performance of large companies in emerging market countries. Top sectors for this passively managed fund include financials, information technology, energy, and more. Taiwan, China and India are among the most represented countries.
2024 first year results: 21.4% Past results (annual for 5 years): 6.7% Expense ratio: 0.39%
Are emerging market ETFs a good investment?
Emerging markets ETFs offer investors a convenient and diverse way to gain exposure to the growth potential of international companies. However, investing in emerging markets, even in ETF form, involves higher risks than investing in developed markets.
Investing in emerging markets involves the following risks:
Political instability: Political instability, coups, and changes in government policy can create uncertainty and instability in emerging markets. Examples of recent geopolitical risks include the war between Russia and Ukraine and tariffs on Chinese companies. Economic challenges: Developing countries may face challenges such as inflation, high levels of debt, and trade disputes, which can affect growth and stock market performance.
Just like you would with individual stocks, it’s important to do your homework before investing in emerging market ETFs. ETF holdings vary widely, with some focusing on a particular theme, such as small-cap stocks, and others focusing on other criteria, such as high-dividend stocks.
Always keep an eye on your expense ratio as well. This fee is expressed as a percentage of invested assets and is deducted annually, directly impacting your return.
While the ETFs on this list may be some of the best performers over the past five years, there are cheaper emerging market funds as well. The SPDR Portfolio Emerging Markets ETF has an expense ratio of 0.07% and the Vanguard FTSE Emerging Markets ETF has an expense ratio of 0.08%.
Price aside, a good ETF carefully balances risk while being broadly representative of emerging market countries.
Finally, it’s important to understand whether a fund is passively or actively managed.
Passive ETFs track broad market indexes like the MSCI Emerging Markets Index, which includes 24 countries and is one of the most commonly used benchmarks in this space. With a passive ETF, the fund manager simply buys the same stocks as the index.
Active ETFs, on the other hand, rely on the fund manager to select individual stocks. Managers aim to outperform the market using various strategies such as growth and value investing. Active ETFs have the potential for higher returns, but they often have higher fees, greater volatility, and no guarantee of outperformance.
conclusion
Emerging market ETFs offer a way to invest in growing economies, but they also come with risks. Research each fund’s specific holdings, country allocation, and expense ratios before investing. While this list features some of the top ETFs from the past five years, it’s important to remember that past performance is no guarantee of future results.
Disclaimer: All investors are encouraged to conduct their own independent research on any investment strategy before making any investment decisions. Additionally, investors should note that past performance of an investment product does not guarantee future price increases.
