Investing in Emerging Markets with ETFs
Investment case
Emerging markets include Brazil, Russia, India and China as well as Taiwan, Argentina, Turkey, Pakisan and others.
Faster Growth
Emerging market economies are generally growing at a faster rate than the developed world and this is set to continue for many years.
The economies are increasingly driving their own growth as domestic consumer spending and trade between emerging market countries are becoming much more important.
As a result, emerging markets rely less on global economic growth than in the past.
Improving Balance Sheets
Emerging markets have better overall economic fundamentals than the developed world, in terms of current account balances and government debt.
There has also been structural improvements across many of these countries in recent years, with foreign debt levels down sharply and increased foreign exchange reserves.
Recent Trends
Several of the emerging economies have large oil sectors and have been helped by rising energy prices. Brazil was helped recently by rating upgrades to investment class from S&P and Fitch.
India has been held by back by concerns about domestic inflation, which recently reached 8.1%.
Despite hope for a lift from the upcoming Olympics, China has been hurt by a severe earthquake in Sichuan province tightened monetary policy to control inflation which has risen to 8.5%.
Taiwan's dependence on exports to the US tech sector is also a near term concern.
Long Term Outlook
Although there is near term uncertainty due to the potential for a global recession and a constant battle against inflaction, the medium to long-term investment case for emerging markets remains compelling.
Overview
The popularity of Emerging Markets investing has lead to the introduction of several types of ETFs.
Total Emerging Markets
The most popular ETF is iShares MSCI Emerging Markets Index Fund (EEM) which tracks an index that captures 85% of the market capitalization of the emerging markets. Vanguard has a similar offering with a lower expense ratio of only 0.25% - the $6 billion Vanguard Emerging Markets ETF (VWO).
Other ETFs that capture most or all of the emerging markets include State Street's SPDR S&P Emerging Markets ETF (GMM) and PowerShares FTSE RAFI Emerging Markets Portfolio (PXH).
Market Cap
The single large cap ETF is PowerShares BLDRS Emerging Markets 50 ADR Index Fund (ADRE). Two small cap offerings include the WisdomTree Emerging Markets SmallCap Dividend Fund (DGS) and the recently introduced SPDR S&P Emerging Markets Small Cap ETF (EWX).
Specialty
For dividend investors, WisdomTree also offers the Emerging Markets High-Yielding Equity Fund (DEM)
Technical investors can choose the DWA Emerging Markets Technical Leaders Portfolio (PIE)
Short
Two ETFs are available for taking short positions on the Emerging Markets. ProShares' Short MSCI Emerging Markets (EUM) and UltraShort MSCI Emerging Markets (EEV) enable investors to hedge their portfolios without having to borrow shares.
Regional Funds
State Street has introduced a series of regional Emerging Market ETFs that cover the Middle East and Africa (GAF), Latin America (GML), Asia Pacific (GMF) and Europe (GUR).
In addition single country ETFs are available for some of the emerging market economies (e.g. see Investing in Brazil with ETFs).
Bond Funds
Fixed income ETFs are also an option for Emerging Markets investors. The PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) and the JPMorgan USD Emerging Markets Bond Fund (EMB) are the two choices.
Top Performers
Largest
1. iShares MSCI Emerging Markets Index Fund (EEM) - $27.2 billion
2. Vanguard Emerging Markets ETF (VWO) - $6.1 billion
3. PowerShares BLDRS Emerging Markets 50 ADR Index Fund (ADRE) - $900 million
Lowest Cost
1. Vanguard Emerging Markets ETF (VWO) - 0.25%
2. PowerShares BLDRS Emerging Markets 50 ADR Index Fund (ADRE) - 0.30%
3. PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) - 0.50%
| ETF Name | Ticker | Asset Class | Yield | Size ($MM) | Expense Ratio (%) | Sponsor |
|---|---|---|---|---|---|---|
| ETF Name | Ticker | Asset Class | Yield | Size ($MM) | Expense Ratio (%) | Sponsor |
| Direxion Daily China Bear 3x Shares | CZI | Equities | 0.0 | 12 | 0.95 | Direxion |
| Direxion Daily China Bull 3x Shares | CZM | Equities | 0.0 | 58 | 0.95 | Direxion |
| Direxion Emerging Markets Bull 3x | EDC | Equities | 0.0 | 418 | 0.95 | Direxion |
| Direxion Emerging Markets Bear 3x | EDZ | Equities | 0.0 | 104 | 0.95 | Direxion |
| Emerging Markets Consumer Titans ETF | ECON | Equities | 0.0 | 206 | 0.85 | Emerging Global Advisors |
| Emerging Global Shares Dow Jones Emerging Markets Titans Composite Index Fund | EEG | Equities | 0.0 | 32 | 0.75 | Emerging Global Advisors |
| DJ Emerging Markets Energy Titans ETF | EEO | Equities | 0.0 | 29 | 0.85 | Emerging Global Advisors |
| Emerging Global Shares Dow Jones Emerging Markets Financial Titans Index Fund | EFN | Equities | 0.0 | 11 | 0.85 | Emerging Global Advisors |
| DJ Emerging Markets Metals & Mining Titans ETF | EMT | Equities | 0.0 | 39 | 0.85 | Emerging Global Advisors |
| Emerging Markets Alphadex Fund | FEM | Equities | 0.0 | 3 | 0.80 | First Trust |
| MSCI Chile Index Fund | ECH | Equities | 0.8 | 926 | 0.65 | iShares |
| MSCI Emerging Markets Index Fund | EEM | Equities | 1.4 | 41,670 | 0.72 | iShares |
| JPMorgan USD Emerging Markets Bond Fund | EMB | Fixed Income (FI) | 4.3 | 2,568 | 0.60 | iShares |
| S&P Emerging Markets Infrastructure Index Fund | EMIF | Equity | 3.7 | 145 | 0.75 | iShares |
| MSCI Emerging Markets Eastern Europe Index Fund | ESR | Equities | 0.8 | 90 | 0.72 | iShares |
| PowerShares BLDRS Emerging Markets 50 ADR Index Fund | ADRE | Equities | 1.7 | 624 | 0.30 | PowerShares |
| Emerging Markets Sovereign Debt Portfolio | PCY | Fixed Income (FI) | 5.8 | 988 | 0.50 | PowerShares |
| DWA Emerging Markets Technical Leaders Portfolio | PIE | Equities | 0.6 | 325 | 0.90 | PowerShares |
| FTSE RAFI Emerging Markets Portfolio | PXH | Equities | 0.6 | 566 | 0.85 | PowerShares |
| PowerShares Emerging Markets Infrastructure Portfolio | PXR | Equities | 0.8 | 243 | 0.75 | PowerShares |
| Ultra MSCI Emerging Markets | EET | Equities | 0.0 | 41 | 0.95 | ProShares |
| UltraShort MSCI Emerging Markets | EEV | Equities | 1.6 | 111 | 0.95 | ProShares |
| Short MSCI Emerging Markets | EUM | Equities | 0.5 | 222 | 0.95 | ProShares |
| Rydex MSCI Emerging Markets Equal Weight ETF | EWEM | Equities | 0.0 | 21 | 0.70 | Rydex |
| Schwab Emerging Markets Equity ETF | SCHE | Equities | 0.0 | 452 | 0.35 | Schwab |
| SPDR S&P Emerging Markets Dividend ETF | EDIV | Equities | 0.0 | 22 | 0.59 | State Street |
| SPDR S&P Emerging Markets Small Cap ETF | EWX | Equities | 0.8 | 671 | 0.66 | State Street |
| SPDR S&P Emerging Middle East & Africa ETF | GAF | Equities | 4.5 | 166 | 0.59 | State Street |
| SPDR S&P Emerging Asia Pacific ETF | GMF | Equities | 1.3 | 757 | 0.59 | State Street |
| SPDR S&P Emerging Markets ETF | GMM | Equities | 2.6 | 232 | 0.59 | State Street |
| SPDR S&P Emerging Europe ETF | GUR | Equities | 2.0 | 325 | 0.59 | State Street |
| Market Vectors Indonesia Index ETF | IDX | Equities | 0.0 | 519 | 0.71 | Van Eck Global |
| Vanguard Emerging Markets ETF | VWO | Equities | 3.4 | 65,288 | 0.25 | Vanguard |
| WisdomTree Asia Local Debt Fund | ALD | Fixed Income (FI) | 0.0 | 240 | 0.55 | WisdomTree |
| WisdomTree Emerging Markets Equity Income Fund | DEM | Equities | 5.8 | 1,492 | 0.63 | WisdomTree |
| WisdomTree Emerging Markets SmallCap Dividend Fund | DGS | Equities | 4.4 | 983 | 0.63 | WisdomTree |
| WisdomTree Emerging Markets Local Debt Fund | ELD | Fixed Income (FI) | 0.0 | 953 | 0.55 | WisdomTree |
Executive Summary:
- Although near term uncertainty is present due to the slowing global economy and persistent inflation, long term outlook for the Emerging Markets is positive.
- Faster growth rates, better balance sheets and decoupling from developed markets are the foundation for the investment story.
- Multiple ways to gain exposure with ETFs:
Total Emerging Markets: EEM, VWO, GMM, PXH
Large Cap: ADRE
- Also, several single country ETFs provide exposure to Emerging Markets.
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