Using ETFs to Get Emerging Markets Exposure

by on May 21, 2014 | ETFs Mentioned:

Emerging markets have become an increasingly popular investing theme over the last few decades as investors seek new outlets for growth in their portfolios. Where many developed economies are trudging along with low GDP growth each year, there are numerous emerging economies that are far outpacing the growth of more mature nations. As such, it is not surprising to see expanding options for emerging market investing.

The ETF world, in particular, has done well to reach into the various corners of the emerging market world, as there are dozens of funds focusing on various aspects of these coveted nations. The two most popular, broad-based funds are the Emerging Markets ETF (VWO) and the MSCI Emerging Markets ETF (EEM), but there are dozens of options beyond these to mega-funds. Below, we outline how investors can get started investing in emerging markets utilizing ETFs.

The BRIC Nations

Brazil, Russia, India, and China make up the BRIC nations; arguably the four most popular emerging markets. These countries have exhibited enticingly high growth and growth potential in the past and were thus grouped under the “BRIC” nickname. There are a large amount of funds dedicated to the BRIC as a whole, as well as each country on its own. For anyone just getting started with emerging market investing, this is probably the best place to start. Here is a list of some of the largest and most popular funds dedicated to these regions:

ETF Region Assets (Millions)
MSCI BRIC Index Fund (BKF) BRIC $399
MSCI Brazil Capped ETF (EWZ) Brazil $4,500
MSCI Russia Capped ETF (ERUS) Russia $276
MSCI India Index ETN (INP) India $380
China Large-Cap ETF (FXI) China $4,800

Country Exposure Beyond the BRICs

As the years have gone on, investors have sought exposure beyond these four nations and ETF issuers have been quick to grant them that request. Now, investors can invest in countries from Argentina and Columbia to Thailand and Indonesia. First, you will want to pick the broad region that you would like to target (like Asia, Africa, Emerging Europe, or Latin America), and then you can boil down your options from there.

Here are some of the most popular funds that dedicate their holdings beyond the borders of the BRIC nations:

ETF Region Assets (Millions)
Beyond BRICs ETF (BBRC) Broad $183
MSCI Mexico Index Fund (EWW) Mexico $2,980
MSCI South Africa Index Fund (EZA) South Africa $580
MSCI Turkey Investable Market Index Fund (TUR) Turkey $564
MSCI Thailand Index Fund (THD) Thailand $523
Vietnam ETF (VNM) Vietnam $470
MSCI Chile Index Fund (ECH) Chile $335
Indonesia Index ETF (IDX) Indonesia $281
MSCI All Peru Capped Index Fund (EPU) Peru $217
Egypt Index ETF (EGPT) Egypt $75
Poland ETF (PLND) Poland $30

Emerging Markets with Style

Aside from the vast array of single/multi-country exposures that can be found in the ETF universe, investors can also narrow down EM exposure with styled funds. Options like small caps, dividend focused, and sector-specific slice and dice the emerging world like never before. Below, we list some of the most popular EM ETFs that feature a stylized approach to investing:

ETF Style Assets (Millions)
Emerging Markets High-Yielding Equity Fund (DEM) High Yield $3,865
MSCI Emerging Markets Minimum Volatility Index Fund (EEMV) Low Volatility $1,935
Emerging Markets SmallCap Dividend Fund (DGS) Small Cap Dividend $1,875
SPDR S&P Emerging Markets Small Cap ETF (EWX) Small Cap $643
SPDR S&P Emerging Markets Dividend ETF (EDIV) Dividend $496
Emerging Markets AlphaDEX Fund (FEM) Quant $408
FTSE RAFI Emerging Markets Portfolio (PXH) RAFI $375

Emerging Market Debt

As the options for emerging market equities were quickly built out, investors turned their gaze towards debt instruments in developing nations. Currently, there are two major classes of EM debt ETFs. One measures the debt of a particular country or basket denominated in U.S. dollars. A second, more recent class, measures the debt of a country or basket denominated in the local currency. Here are some of the most popular options and their denominations:

ETF Denomination Assets (in Millions)
JPMorgan USD Emerging Markets Bond Fund (EMB) U.S. Dollar $4,112
Emerging Markets Sovereign Debt Portfolio (PCY) U.S. Dollar $2,025
Emerging Markets Local Debt Fund (ELD) Local Currency $872
Emerging Markets Local Currency Bond ETF (EMLC) Local Currency $823

Is It Really Emerging?

The definition of an emerging market is somewhat subjective, leaving a number of border countries up for debate around the financial world. Two countries in particular, South Korea and Taiwan, are heavily debated. Some consider the two nations to be fully developed while others leave them in the emerging category. To learn more about these two nations and compare them to other economies around the world, click here.

The question of whether these nation are emerging is important, as hefty exposure to these two countries may make a particular fund not quite as “emerging” as you had hoped. Be sure to always utilize our “Holdings” tab on each ETF ticker page to take a deeper dive into the country exposures of a particular fund.

Investing on the Frontier

Last but not least, we have frontier markets. These economies are less developed than emerging nations and come with a high risk/reward outlook. They may be too volatile for some, but their growth potential can be especially attractive to those who are willing to stomach some volatility. This space is still relatively undeveloped in the ETF world, but there are a few options for investors. Here is a list of some of the most popular frontier market ETFs:

ETF Region Assets
MSCI Frontier 100 Index Fund (FM) Broad $840
Next Emerging & Frontier ETF (EMFM) Broad $160
Frontier Markets ETF (FRN) Broad $87
Nigeria Index ETF (NGE) Nigeria $17
Central Asia & Mongolia Index ETF (AZIA) Mongola/Central Asia $2

The Bottom Line

The Emerging Market ETF space is cotinually growing, giving investors more options than ever at their fingertips. From broad-based exposure to honing in on a particular country, ETFs allow investors of all styles to add meaningful emerging market allocations to their portfolio.

Follow me on Twitter @JaredCummans

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Disclosure: No positions at time of writing.