Emerging markets are exciting opportunities. These markets are beginning to grow into developed phases, and when markets begin to grow, there are significant potential gains for early investors.
However, finding individual investments in the emerging markets sector is a daunting and often risky business.
There are tons of small-cap stocks and penny stocks in the space that have little or no track record of profitable operations. Beginner investors are often sucked into these risky plays by the allure of compelling gains offered by tapping into opportunities early.
To avoid the intensive research associated with investing in emerging markets and the added risk of investing in these often high-volatility stocks, many look toward exchange-traded funds (ETFs) as a way to gain exposure to emerging markets.
What Are Emerging Markets ETFs?
Emerging markets ETFs pool funds from large groups of investors that are then invested in emerging market assets like stocks and bonds.
There are two types of emerging markets:
- Emerging Economies. Emerging economies are economies that are growing quickly. While they are not quite developed economies yet, they are well on the path to becoming developed, and the gap between emerging and developed is generally filled with compelling growth. As a result, publicly traded companies that operate in emerging economies also have the potential to realize compelling growth. Some of the most popular emerging economies among investors include China, Brazil, India, Taiwan, Russia, and South Korea.
- Emerging Industries. Emerging industries are industries surrounding products that are emerging. One of the best examples of an emerging industry came as the result of the COVID-19 pandemic. As the pandemic spread around the world, biotechnology companies jumped into action alongside companies that produce cleaning supplies, sanitizers, and personal protective equipment, all of which, combined, created the COVID-19 industry, one that has seen compelling growth over the past year.
Although there are big differences between emerging economies and emerging industries, there’s one central factor they have in common: Both offer the potential for early-stage growth that’s significantly higher than that seen in developed markets.
The funds on this list are primarily focused on emerging economies outside the U.S.
Emerging markets ETFs focus their allocation strategy on these young, high-growth markets, keeping diversification in mind and providing investors with widespread exposure to the gains these markets have to offer.
Moreover, these ETFs trade on the major U.S. exchanges like the Nasdaq and New York Stock Exchange, making them highly liquid and easy for investors to buy and sell.
Pro tip: Earn a $30 bonus when you open and fund a new trading account from M1 Finance. With M1 Finance, you can customize your portfolio with stocks and ETFs, plus you can invest in fractional shares.
How to Compare Emerging Markets ETFs
Emerging markets ETFs aren’t all created equal. Some will generate greater returns, some will charge higher fees, and some will take more profound risks than others.
Before blindly diving into an emerging markets ETF, it’s important to consider a few key stats of each fund:
- Expense Ratio. An ETF’s expense ratio represents the cost associated with investing in the fund. According to the Wall Street Journal, the average ETF comes with an expense ratio of 0.44%. However, from one option to the next, these ratios can vary wildly.
- Historic Performance. Historic performance is an important factor when investing in any emerging markets ETF. At the end of the day, investing in emerging markets is riskier than investing in developed markets, but these investments also generally come with a higher growth potential. So, it’s important to invest in ETFs with a strong history of producing compelling gains.
- Dividend Yield. Many stocks in emerging markets make dividend payments. Some emerging markets ETFs come with higher dividend yields than you see even in the utilities sector, which is known for compelling dividends. If your goal is to generate income through your investments, it’s important to look for high dividend yields as you choose emerging markets ETFs.
- Dividend Growth. Dividend growth is a key indicator of strength in an ETF that provides dividend payments. After all, as the fund grows, profitability within the fund should grow, meaning dividend payments should do the same.
- Assets Under Management. Finally, assets under management refers to the total amount of money that the ETF manages for its customers. ETFs with few assets under management aren’t popular, which could lead to liquidity problems when it’s time to cash in your investment. Conversely, popular ETFs will have higher amounts of assets under management. These funds are relatively easy to sell when it’s time to cash in.
Best Emerging Markets ETFs
1. Vanguard FTSE Emerging Markets ETF (VWO)
Vanguard is one of the most popular investment-grade fund providers on Wall Street today.
Not only is the company known for generating compelling gains for its investors, Vanguard funds have become popular for their industry-leading low expense ratios.
The Vanguard FTSE Emerging Markets ETF invests in companies in emerging markets including China, Brazil, Taiwan, and South Africa.
The ETF is designed to closely track the Financial Times Stock Exchange (FTSE) Emerging Markets All Cap China A Inclusion Index, which includes a diversified group of stocks across a wide range of market caps and sectors in emerging markets.
- Expense Ratio: As with most Vanguard funds, this ETF comes with an incredibly low expense ratio of just 0.10%.
- Historic Performance: The returns on the ETF have been nothing to shake a stick at. Over the past year, investors in VWO realized gains of more than 25%. Three-year and five-year annualized returns have been 4.05% and 13.86%, respectively.
- Dividend Yield: Historically, the dividend yield on the VWO has ranged from just over 2% on the low end to nearly 4% on the high end. Keep in mind that the average dividend yield of the high-dividend utilities sector is just below 4%.
- Dividend Growth: The dividend history on the ETF seems inconsistent. However, there’s a pattern of growth here. Second-quarter dividend payments tend to be the lowest, with dividends growing from this low point to highs in the first quarter of the following year. On a year-over-year basis, the VWO has a strong history of growing dividend payments.
- Assets Under Management: With more than $105 billion in assets under management, the fund is clearly overwhelmingly popular, meaning exits should be relatively quick and painless.
Considering its overwhelmingly strong growth and market-leading low expense ratio, VWO is an ETF that should not be ignored.
Pro tip: Have you considered hiring a financial advisor but don’t want to pay the high fees? Enter Vanguard Personal Advisor Services. When you sign up you’ll work closely with an advisor to create a custom investment plan that can help you meet your financial goals.
2. iShares MSCI Emerging Markets ETF (EEM)
The iShares MSCI Emerging Markets ETF tracks the returns of the Morgan Stanley Capital International (MSCI) Emerging Markets Index.
The EEM portfolio is made up of more than 800 large-cap and mid-cap emerging markets stocks, providing highly diversified exposure to some of the top stocks in emerging markets.
- Expense Ratio: The fund’s expense ratio is a bit higher than average at 0.7%. However, the high expense ratio is justified by a strong historic performance.
- Historic Performance: The fund’s performance has been compelling, to say the least. Over the past year, investors in the ETF have enjoyed gains in the amount of 17.03%. On an annualized basis over the past three and five years, gains have been 5.42% and 12.26%, respectively.
- Dividend Yield: The dividend yield on the ETF is just over 1.6%. While it’s not the strongest dividend yield among emerging markets ETFs, it is a respectable source of income.
- Dividend Growth: The fund has had some hiccups in dividend growth over the past several years but has a strong history of providing growing dividend payments for the most part.
- Assets Under Management: There is more than $28 billion under management in the fund, meaning it is another overwhelmingly popular investment option with few liquidity concerns.
While this fund’s relatively high expense ratio is a bit of a deterrent, the outsize gains investors have experienced over the past five years are hard to ignore.
This combined with growing dividends and an incredible management team makes the ETF one that’s well worth considering.
3. iShares Core MSCI Emerging Markets ETF (IEMG)
The iShares Core MSCI Emerging Markets ETF was designed to provide diversified exposure to small-, medium-, and large-cap companies in global emerging markets across a wide range of sectors.
- Expense Ratio: With an expense ratio of 0.11%, the iShares Core MSCI Emerging Markets ETF comes with some of the lowest costs in the industry, falling in line with low-cost funds offered by Vanguard.
- Historic Performance: While this fund comes with some of the lowest costs among emerging markets ETFs, you’ll have access to a fund with a history of significant gains. Over the past year, the ETF has generated gains of 17.88%, with three- and five-year annualized returns coming in at 5.71% and 12.35%, respectively.
- Dividend Yield: Over the past several years, the dividend yield on the IEMG ETF has ranged from just over 1.6% to just over 2.6%. Although it’s not the highest dividend yield in the business, the fund does provide respectable dividend payments.
- Dividend Growth: As with most dividend-paying ETFs, this fund had a few hiccups in terms of dividend payments over the past several years. However, for the most part, the fund has resulted in relatively consistent dividend growth.
- Assets Under Management: Investors have poured more than $68 billion into the IEMG ETF, making it one of the most popular funds on the market today.
The iShares Core MSCI Emerging Markets ETF is an overwhelmingly popular investing option for several good reasons. Not only does the ETF have a strong history of generating compelling returns, but it also offers respectable dividend payments that tend to grow with time.
All in all, this is another ETF for the watch list.
4. Schwab Emerging Markets Equity ETF (SCHE)
No list of the top ETFs in any category would be complete without a mention of Charles Schwab, another of the most trusted investment firms on Wall Street today.
The Schwab Emerging Markets Equity ETF was designed to track the returns of the FTSE Emerging Index
Investing in more than 20 emerging economies around the world, the fund is one of the most diversified portfolios in emerging markets today. The portfolio provides exposure to both mid- and large-cap stocks.
- Expense Ratio: In line with some of the lowest-cost ETFs on the market today, the expense ratio on the fund is just 0.11%, giving you the ability to hold onto more of your returns without compromising performance.
- Historic Performance: The performance of the SCHE ETF is comparable to the top performers in the emerging markets sector. In the past year, investors have earned a return of more than 14%. Three-year and five-year annualized returns have been 5.97% and 12.29%, respectively.
- Dividend Yield: Over the past few years, the dividend yield on the SCHE ETF has ranged from just over 2.3% to just under 4%, making it one of the better performers on this list in terms of dividends.
- Dividend Growth: With the exception of a brief lull in growth during the coronavirus pandemic, this fund has a strong history of producing compelling dividend growth.
- Assets Under Management: The SCHE ETF is popular, with more than $8 billion in assets under management.
This fund is one of the top ETFs in the emerging markets space in terms of both performance and dividends.
Moreover, with a world-class management team and low expenses, you’ll be able to sleep well at night, making this ETF a top pick among emerging markets investors.
5. SPDR Portfolio Emerging Markets ETF (SPEM)
Managed by State Street Global Advisors — a division of State Street Corporation — the SPDR Portfolio Emerging Markets ETF is one of the top emerging markets ETFs to consider.
The fund was designed to perform in line with the S&P Emerging BMI Index, which is a broad-based index of global equities domiciled in emerging markets. As a result, the SPEM is a diversified investment in a wide range of emerging markets stocks ranging from small-cap to large-cap.
- Expense Ratio: The expense ratio on the SPEM ETF is just 0.11%, falling in line with some of the lowest-cost ETFs on the market today.
- Historic Performance: This fund has been one of the best performing ETFs on the market in recent years. Over the past year, the ETF has generated gains of nearly 25%. On an annualized basis over the past three- and five-year periods, gains have been 3.89% and 14.39%, respectively.
- Dividend Yield: Over the past few years, dividend yields on this ETF have ranged from just over 1.7% to just under 3%, meaning investments in the fund tend to earn respectable dividend payments.
- Dividend Growth: Over the past few years, investors in the fund have enjoyed compelling dividend growth. However, the dividends did falter as the COVID-19 pandemic took hold in early 2020.
- Assets Under Management: The SPEM ETF holds more than $5.6 billion in assets, suggesting it is yet another popular option among emerging markets ETF investors.
With an expense ratio that’s well below average, the SPDR Portfolio Emerging Markets ETF provides access to a broad and diversified portfolio of emerging-market companies.
The gains experienced over the past several years speak for themselves, making dividend payments icing on the cake and this ETF well worth your consideration.
6. Invesco RAFI Strategic Emerging Markets ETF (ISEM)
The Invesco RAFI Strategic Emerging Markets ETF is based on the Invesco Strategic Emerging Markets Index, which generally includes larger, higher-quality emerging-market companies.
The fund is weighted toward large-cap emerging stocks across a wide range of emerging markets and sectors.
- Expense Ratio: With an expense ratio of 0.35%, the Invesco RAFI Strategic Emerging Markets ETF isn’t the lowest cost on the market, but it’s still well below the industry average.
- Historic Performance: The fund is relatively new, so there’s not much by way of historical data. However, over the past three months, investors in the ETF have earned more than 17%.
- Dividend Yield: The dividend yield on this ETF is just over 1%. It’s definitely not the highest dividend-paying ETF in emerging markets, but the fund does provide regular payments.
- Dividend Growth: Because the ISEM ETF is relatively new, there’s not enough history to gauge dividend growth.
- Assets Under Management: Finally, as a relatively new ETF, assets under management are quite low at just $22 million. However, that figure is growing rapidly.
As a newer fund in emerging markets, there’s a bit of added risk to consider before investing in the Invesco RAFI Strategic Emerging Markets ETF.
However, the more than 17% growth seen in the ETF over the past few months is compelling, and the management team at Invesco behind the ETF is one of the best on Wall Street, making this a fund to watch closely.
7. Schwab Fundamental EM Large Company Index ETF (FNDE)
The Schwab Fundamental EM Large Company Index ETF was designed to track the Russell RAFI Emerging Markets Large Company Index consisting of the largest emerging markets companies based on fundamental measures.
As a result, the vast majority of holdings in the fund are large-cap stocks across a wide array of emerging markets.
- Expense Ratio: With an expense ratio of 0.39%, the Schwab Fundamental EM Large Company Index ETF is an average-priced fund.
- Historic Performance: Historically, the Schwab Fundamental EM Large Company Index ETF has enjoyed an impressive performance. However, the COVID-19 pandemic led to declines over the past year, with a loss of 2.79%. However, the fund’s five-year annualized return of 11.88% suggests the ETF is still a strong long-term investment.
- Dividend Yield: The dividend yield on the Schwab Fundamental EM Large Company Index ETF currently sits at about 2.3%. It may not be the highest dividend yield on this list, but the ETF does provide respectable dividend payments.
- Dividend Growth: Dividend growth on the FNDE ETF has been all over the place during the past several years. However, the fund has historically made compelling dividend payments.
- Assets Under Management: There are currently $3.61 billion in assets under the fund’s management. It may not be the most popular on the list, but you can’t discount the popularity of a fund that has attracted more than $3 billion in investments.
The Schwab Fundamental EM Large Company Index ETF has felt some pain over the past year, most of which was the result of the COVID-19 pandemic.
However, the long-term historic performance of the ETF has been compelling, to say the least. That in combination with a world-class management team and a solid dividend yield makes this ETF one for the books.
8. SPDR MSCI Emerging Markets Fossil Fuel Reserves Free ETF (EEMX)
Another fund managed by State Street Global Advisors, the SPDR MSCI Emerging Markets Fossil Fuel Reserves Free ETF is a compelling option for investors looking to gain diversified exposure to emerging market stocks with a socially responsible angle.
The EEMX ETF tracks the MSCI Emerging Markets ex Fossil Fuels Index. Designed for the environmentally conscious investor, the fund provides widespread exposure to emerging markets companies while avoiding those that own fossil fuel reserves.
- Expense Ratio: With an expense ratio of 0.30%, the EEMX isn’t the lowest-cost fund on the list, but it is reasonably inexpensive considering the average ETF expense ratio of 0.44%. Socially responsible ETF expenses tend to be a little higher, making the cost of this fund look even more attractive.
- Historic Performance: The SPDR Emerging Markets ex Fossil Fuels Index ETF is a relatively new ETF, and social impact investing surrounding climate change is a relatively new investing model. However, over the past year, the fund has generated returns of more than 30%, making its performance impressive compared to any benchmark.
- Dividend Yield: Although the EEMX has already proven to be a compelling performer in terms of price appreciation, it also offers dividends at a yield of about 1.3%. Talk about icing on the cake!
- Dividend Growth: As a relatively new ETF, there is not enough data to assess dividend growth over any meaningful period of time.
- Assets Under Management: The fund has $147.72 million under management. Although that’s no comparison to the billions of dollars under management at other ETFs on this list, it’s definitely impressive considering the fund is so young.
All told, there are some questions regarding historic performance and dividends when it comes to the SPDR Emerging Markets ex Fossil Fuels Index ETF, but those questions arise because there’s not much history to speak of yet.
Although the fund is young, it’s garnering quite a bit of attention with low expenses and significant gains during the past year.
9. WisdomTree EM ex-State-Owned Enterprises ETF (XSOE)
WisdomTree is another of the world’s most trusted asset management firms. The company offers a wide range of ETFs, with options that fit into just about any investing strategy.
The WisdomTree EM ex-State-Owned Enterprises ETF provides investors with exposure to a diversified portfolio of emerging market stocks, specifically in companies that are not state-owned. The fund defines state-owned as ownership of more than 20% held by the government in the region.
- Expense Ratio: The expense ratio on the fund is 0.32%, making it another emerging markets ETF that offers an expense ratio below the industry average.
- Historic Performance: The XSOE ETF is an incredible performer, providing investors with returns of more than 28% over the past year. On a three-year and five-year annualized basis, the fund has yielded returns of 9.33% and 15.77%, respectively.
- Dividend Yield: The dividend yield on the ETF sits at about 1.85%, meaning investors get strong dividend payments as icing on the cake on top of the fund’s impressive returns.
- Dividend Growth: Over the past few years, dividend payment growth has been relatively stagnant on the XSOE ETF. However, the outsize price appreciation in the fund makes a lack of dividend payment growth more acceptable.
- Assets Under Management: More than $3.4 billion have been invested in the fund, making it a popular option among ETF investors.
With 28% gains over the past year, the XSOE ETF is one of the best performers on Wall Street as of late.
Moreover, while WisdomTree was founded relatively recently in 2006, the company has grown to become one of the most trusted fund managers on the street.
Combine strong fund management and strong returns, and you have a pretty tasty cake, with the dividend payments as icing on top.
10. iShares JPMorgan USD Emerging Markets Bond ETF (EMB)
For investors looking for a safer play in the emerging markets sector, the iShares JPMorgan USD Emerging Markets Bond ETF is a great option. The ETF gives investors widespread exposure to U.S. dollar-denominated government bonds with issuers in emerging market countries.
This is a highly diversified emerging market government bond fund that owns debt positions in more than 30 different emerging economies.
- Expense Ratio: The iShares JPMorgan USD Emerging Markets Bond ETF comes with an expense ratio of 0.39%. While it’s not the lowest on the list, the expense ratio is competitive.
- Historic Performance: The EMB is definitely not the best performing ETF on this list. However, it’s not designed to compete with stocks. This is a bond fund — a safer, more stable play. Compared to other bonds, the fund’s return of 2.28% over the past year is a positive. On an annualized basis, the ETF has generated returns of 4.39% and 6.37% over the past three- and five-year periods.
- Dividend Yield: The iShares JPMorgan USD Emerging Markets Bond ETF is known to produce strong dividends. Over the past several years, dividend yields have ranged from 3.96% to 5.64%, making up for the relatively slow-but-steady price appreciation in the ETF.
- Dividend Growth: Over the past few years, the EMB hasn’t seen much by way of dividend growth. Nonetheless, with a dividend yield that’s in line with or above the high-dividend paying utilities sector, the ETF is an attractive option for income investors.
- Assets Under Management: Investors have piled more than $18.6 billion into the fund, making it one of the most popular emerging markets ETFs on Wall Street today.
Although the iShares JPMorgan USD Emerging Markets Bond ETF isn’t a major competitor in terms of price appreciation, it’s one of the most impressive emerging markets ETFs for dividends
At the same time, due to investments in emerging market government bonds rather than stocks, the risk of investing in these often high-volatility markets is greatly reduced. As such, the EMB ETF is worth a look.
If you want exposure to emerging markets but don’t have the time or understanding of the market to be effective in the space, ETFs are a great option to consider.
Not only do these investments provide widespread exposure to different areas of the emerging markets sector, but they’re also created by some of the most well-respected minds on Wall Street.
Nonetheless, it’s important to keep in mind that, like stocks, not all ETFs are created equal.
A successful investment decision, even in terms of investment-grade funds, is based on research and a complete understanding of what you’re investing your hard-earned dollars into.