Daniel Sotiroff: ETFs in the diversified emerging-markets category don’t earn the same high marks as their counterparts in the US large-blend or foreign large-blend categories. Emerging-markets ETFs tracking broad market indexes earn Average Process Pillar ratings, while the Process ratings for their US and developed-markets counterparts often land at Above Average or sometimes even High.
Much of the reason is that this is one of the few categories where active managers have demonstrated an advantage. Emerging-markets ETFs also have to contend with unique risks that are largely absent in developed markets. Geopolitical risks like the war between Russia and Ukraine or sanctioned Chinese companies are two examples that have surfaced in recent years. And some governments have the ability to influence the underlying businesses to achieve political objectives that don’t always benefit public shareholders.
But there are some good index-tracking options to consider for the long run.
iShares MSCI Emerging Markets Min Vol Factor ETF EEMV
The first emerging-markets ETF is Silver-rated iShares MSCI Emerging Markets Min Vol Factor ETF, which trades under the ticker EEMV.
It’s still exposed to geopolitical risks and potential government interference, but it takes some of the edge off by systematically targeting less risky stocks and combining them in a way that’s designed to cut back on volatility. It’s best to think of this strategy as less sensitive to the market’s ups and downs. That means it tends to outperform the broader emerging-markets universe during drawdowns, but it will likely underperform during bull markets.
Over the long run, that give and take tends to wash out. So far, its long-term total return has weighed in similar to the MSCI Emerging Markets Index. And the consistency with which it has followed its expected performance pattern bodes well for its future risk-adjusted performance.
The next two ETFs for today are similar in a lot of ways with one important difference. Bronze-rated Vanguard FTSE Emerging Markets ETF, ticker VWO, and Bronze-rated iShares Core MSCI Emerging Markets ETF, ticker IEMG, both capture the entire emerging-markets universe for less than 10 basis points per year in fees.
Despite those similarities, each ETF applies a slightly different filter to the markets that it classifies as emerging. VWO punts on Korean stocks because it tracks an index from FTSE that classifies South Korea as a developed market. At the same time, IEMG includes Korean stocks because they meet MSCI’s emerging-markets criteria.
What’s important to realize is that neither ETF is better than the other. Both are great long-term options. But the subtle differences in country classification is an important distinction to consider, especially when pairing these ETFs with a developed-markets mutual fund or ETF that you may hold in your portfolio. As a general rule, each ETF should be paired with its developed-markets counterpart. That means VWO should be matched with an ETF that’s tracking a FTSE index, and IEMG will play best with one tracking an MSCI index. That will prevent overweighting or underweighting countries like South Korea in your broader investment portfolio, and help you get the most from their diversification potential.
The 10 Big Emerging Markets (BEM) economies are (alphabetically ordered): Argentina, Brazil, China, India, Indonesia, Mexico, Poland, South Africa, South Korea and Turkey. Egypt, Iran, Nigeria, Pakistan, Russia, Saudi Arabia, Taiwan, and Thailand are other major emerging markets.
The 10 Big Emerging Markets (BEM) economies are (alphabetically ordered): Argentina, Brazil, China, India, Indonesia, Mexico, Poland, South Africa, South Korea and Turkey. Egypt, Iran, Nigeria, Pakistan, Russia, Saudi Arabia, Taiwan, and Thailand are other major emerging markets.
The iShares Edge MSCI EM Value Factor UCITS ETF aims to track the performance of an index composed of large- and mid-capitalization stocks from emerging markets, which demonstrate high value characteristics: comparing the price of equity to estimated future earnings; the price of equity relative to book value; and ...
One option for a solid three-ETF portfolio could be to include the Schwab U.S. Dividend Equity ETF (SCHD), the Vanguard S&P 500 ETF (VOO), and the Invesco QQQ Trust (QQQ). The SCHD ETF focuses on high-quality dividend stocks, which can provide stable income and potential long-term growth.
With emerging markets, it's a good idea to consider a fund or exchange-traded fund (ETF) to gain broad exposure rather than picking one or two developing economies. It's always wise to talk to a regulated financial adviser before investing to develop an investment strategy and ensure a diversified portfolio.
Investing in individual emerging markets stocks is difficult for the average investor, so mutual funds and ETFs are often the most effective way to do it. Look for funds with high assets under management. Choose actively managed or passive funds as you do your research.
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