What Is an Emerging Market ETF?
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What Is an Emerging Market ETF?

4 Min.

Investors can diversify their portfolios by investing in an exchange-traded fund (ETF) focusing on emerging economies transitioning from a closed to a market economy. While investing in emerging markets can offer high returns, it also carries high risks due to instability. An ETF that invests in emerging markets can provide diversity to an investment portfolio as it is less correlated to U.S. equities. Moreover, ETFs are more liquid than mutual funds, as they can be bought and sold instantly on an exchange. There are several emerging market ETFs available for investors to choose from based on their investment profile.

Basics

An Exchange-Traded Fund (ETF) centered on emerging market economies spotlights equities from diverse continents, encompassing Latin America, Asia, and Eastern Europe. While these ETFs' underlying benchmarks differ among fund managers, a common thread lies in their passive management approach and inclusion of stocks from numerous nations unless explicitly specified.

Deciphering Emerging Market ETFs: Unveiling Investment Prospects

Emerging market ETFs encompass stocks from emerging economies, offering investors compelling growth potential over time. The allure of heightened returns from these burgeoning economies is an imperative consideration for long-term investors. The growth momentum in these nations is often driven by robust expansion rates and abundant natural resources that industrialized nations seek.

Embarking on investments in emerging markets necessitates overcoming a steep learning curve. Factors like geopolitical complexities, political uncertainty, and limited transparency prevalent in these economies could deter the average investor. In this context, opting for an emerging market ETF becomes prudent, mitigating the need to individually identify and assess securities within these intricate markets.

An emerging market ETF empowers investors to selectively target specific subregions or asset classes within emerging markets. Among the array of emerging market ETFs, some funds hone in on distinct market capitalizations, dividend-rich equities, or sectors with pronounced allocations.

Pros and Cons of Emerging Market ETFs

Emerging market ETFs offer diversification advantages and the potential for returns that investors appreciate. These ETFs, which allocate investments to equities within emerging markets, display a lower correlation with U.S. equities compared to ETFs featuring primarily domestic equities.

Liquidity is another strong suit of emerging market ETFs compared to mutual funds in the same category. ETFs, tradable instantly on exchanges, outpace the redemption restrictions of mutual funds, which are priced at day-end. Direct investment in local emerging market stock exchanges often incurs higher trading costs.

Potential investors must factor in various risks inherent to emerging markets. Their transition from closed to market economies renders them more volatile than established markets. Geopolitical, currency, and governance vulnerabilities are concerns, along with slightly elevated expense ratios for emerging market ETFs compared to domestic-focused funds.

Navigating Emerging Market ETF Investments

When investing in emerging market ETFs, options offer diverse choices. Among the favored indexes are:

  • The MSCI Emerging Market Index is often embraced by investors as a cornerstone for their investment approach.
  • Blackrock, a prominent investment manager, boasts a range of emerging market ETFs, including the iShares MSCI Emerging Markets ETF (EEM), which meticulously mirrors the abovementioned index.
  • Further prominent choices encompass the SPDR Portfolio Emerging Markets ETF (SPEM), Schwab Emerging Markets Equity ETF (SCHE), and the Goldman Sachs Activebeta EMkts Eq ETF (GEM).

While selecting an emerging market ETF, prioritizing personal comfort, comprehending country-specific risks, and assessing associated costs remain paramount considerations.

Conclusion

Emerging market ETFs offer investors a dual opportunity: diversification and exposure to transitioning economies. These ETFs provide enticing returns alongside inherent risks tied to instability. A notable strength lies in their reduced correlation with U.S. equities, enhancing portfolio diversity. Additionally, ETF liquidity surpasses that of mutual funds, allowing swift trading on exchanges. With options like the MSCI Emerging Market Index trackers and offerings from established firms like Blackrock, investors can tailor their selections while weighing risks and costs.

Emerging Market ETF
Exchange-Traded Fund (ETF)
MSCI Emerging Markets Index
iShares MSCI Emerging Markets ETF (EEM)
SPDR Portfolio Emerging Markets ETF (SPEM)
Schwab Emerging Markets Equity ETF (SCHE)
Goldman Sachs Activebeta EMkts Eq ETF (GEM)
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