Six of the best emerging markets ETFs
ETFs are widely regarded as being excellent products for getting exposure to a wide number of asset classes, but with competing ETF providers using different indices it can be difficult to know where to start. In the second of this series we take a look at six emerging market ETFs.
Over the five years to the end of April 2017 emerging markets underperformed quite considerably compared with developed markets, as the MSCI Emerging Market Index was up 35% and the MSCI World gained 101.3%.
Developed markets, powered by the US, have had better earnings growth, but much of this outperformance has been generated by becoming more expensive on a relative basis. Emerging markets now trade on a forward price to earnings (P/E) ratio of 12.9 times, compared with 17.4 times for developed markets — a discount of around 25%.
Emerging Markets are definitely not a homogenous area. Korea and Taiwan look fully developed under most economic metrics. Others, such as South Africa and Turkey, are fraught with political risk, China and India benefit from low commodity prices, while Russia and Brazil rely on commodity exports.
Investors looking to get exposure to single countries can easily do so, as almost all emerging market nations are available to purchase as individual exchange trading funds (ETFs), but in this article we focus on six ETFs that offer broad country diversification, covering a range of best-in-class market capitalisation, socially responsible (ESG) and factor-exposed ETFs that investors may want to consider for a part of their investment allocations.
In instances where there was not much difference between competing products in terms of performance, we took size, daily volume and average bid-ask spreads into consideration.
Use our ETF screener to research the right UK equity ETFs for you. All the ETFs described below can be bought on IG’s share dealing platform, where commissions start at just £5 and there are no custody or platform fees.
iShares Core MSCI EM IMI UCITS ETF (EMIM)
This stands out as a low-cost way of getting market cap exposure to the asset class, with high liquidity and a bid-ask spread of just 0.09%. China is an increasingly large part of the market cap index, accounting for 27%.
Lyxor FTSE Emerging Minimum Variance UCITS ETF (MVMX)
Moving into the Smart Beta area, this ETF from Lyxor aims to improve risk-adjusted return by reducing portfolio volatility. Since inception it reports 12% lower risk than a market cap index, as well as lower drawdowns. The largest exposure is to India (14%), with China, Taiwan and Thailand making up the five largest countries. It has a total expense ratio of 0.4%.
SPDR MSCI Emerging Markets Small Cap UCITS ETF (EMSM)
SPDR’s small cap ETF has an average market cap of just £530 million. It uses an optimisation strategy to replicate the index, but still holds 981 positions with the largest holding being just 0.38% in weight. China, Taiwan and Korea account for more than 55% of the holdings, and it has a total expense ratio of 0.55%.
iShares MSCI EM SRI UCITS ETF (SUSM)
This ETF was launched in mid-2006, and is an antidote to those investors that like emerging markets but dislike having a large allocation to China (3.3% weight) and its state owned enterprises. MSCI have been running the strategy for six years, with nearly 3% a year annual outperformance of the conventional index. It has a total expense ratio of 0.35%.
WisdomTree Emerging Markets Equity Income UCITS ETF (DEM)
WisdomTree specialises in producing ETFs for investors that want exposure to more unconventional parts of the investment universe. This ETF ranks the top 30% of stocks by yield, and weights them based on total value of dividends paid. It currently yields 5.2%, and distributes the income twice a year. It has a total expense ratio of 0.46%.
iShares EM Infrastructure UCITS ETF (IEMI)
iShares are by some stretch the leaders in providing emerging market ETFs, and this final one offers concentrated exposure to 30 infrastructure stocks, including exposures to energy, utilities and transport. On the downside, it is quite expensive with a total expense ratio of 0.74%.