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Emerging markets represent an attractive investment opportunity because they invest in fast-growing economies poised for significant growth. These markets offer a unique combination of high growth potential and increased risk. For investors looking to diversify their portfolios, emerging market exchange-traded funds (ETFs) provide an affordable way to take advantage of the economic growth of these developing countries. However, navigating the complexities of emerging markets requires a deep understanding of their inherent risks, including political instability, currency fluctuations and a volatile regulatory environment. Let’s take a few minutes and go over the basics you need to know to start investing in emerging markets.

Understanding the attractiveness of emerging markets

Emerging markets are countries experiencing rapid economic growth and industrialization. These economies often exhibit common characteristics such as emerging financial markets, higher rates of economic growth than developed markets, a growing middle class, and increasing foreign investment.

Countries commonly classified as emerging markets include Brazil, Russia, India, China and South Africa (collectively known as the BRICS countries), as well as many countries in Southeast Asia, Latin America and Eastern Europe. These markets have significant potential due to their expanding consumer base and increasing integration into the global economy. However, investing in these markets often comes with higher volatility and risk compared to developed markets.

Exchange Traded Funds: Gateway to Emerging Markets

ETFs have become a popular vehicle for investors looking to gain exposure to a variety of asset classes, including emerging markets. These investment funds hold a basket of securities, such as stocks or bonds, and typically track a specific index. They are traded on stock exchanges as individual stocks, offering investors intraday liquidity and ease of trading.

Most emerging markets ETFs are passively managed, meaning they replicate the performance of a selected index rather than actively selecting individual stocks. This passive approach typically results in lower expense ratios compared to actively managed mutual funds. ETFs also offer diversification benefits by providing exposure to a wide range of companies within a single investment, reducing the risk associated with investing in individual stocks.

Several ETFs offer exposure to emerging markets, each with unique characteristics suited to different investor profiles. When considering investing in emerging markets ETFs, it is critical to understand the differences between the funds available. Let’s look at three of the most well-known ETFs, each of which offers a unique approach to harnessing the potential of these markets.

iShares MSCI: Classic Pick with High Liquidity

For investors looking for a well-established and highly liquid option, the iShares MSCI Emerging Markets ETF NYSEARCA: EEM is a strong contender. Managed by BlackRock, the fund is one of the oldest emerging markets ETFs, with a track record that dates back to its inception in 2003. EEM seeks to reflect the performance of the MSCI Emerging Markets Index, a widely recognized benchmark comprising large and mid-market markets. companies with capitalization in many emerging market countries.

With $17.80 billion in assets under management as of December 20, 2024, EEM offers unprecedented liquidity, trading an average of nearly 28 million shares per day. This high trading volume makes it an excellent choice for investors who prioritize the ability to enter and exit positions quickly and efficiently. It is important to note that EEM does not include South Korea in its assets. EEM has an expense ratio of 0.70%. While this ratio is higher than some of its peers, the fund’s liquidity and robust exposure may justify the cost for confident investors.

Vanguard FTSE: Broad diversification at a great price

If broad diversification and cost efficiency are your main concerns, then the Vanguard FTSE Emerging Markets ETF NYSEARCA:VWO this is an exceptional choice. This ETF tracks the FTSE Emerging Markets All Cap China A Inclusion Index, which covers a broad basket of more than 4,500 stocks, including large-, mid- and small-cap companies in emerging markets, including South Korea.

This broad coverage gives investors access to a wider range of companies and sectors compared to more narrowly focused funds. What sets VWO apart is its amazingly low expense ratio of just 0.08%, making it one of the most cost-effective options in emerging markets. This low cost, coupled with the fund’s comprehensive diversification, has attracted significant assets, with AUM reaching $81.16 billion as of December 20, 2024.

Moreover, Vanguard recently revised its VWO diversification policy. This change allows the fund to maintain its investment objective of tracking a target index even if it becomes “non-diversified” due to index rebalancing or market movements. For long-term investors seeking broad exposure to emerging markets at unbeatable value, VWO represents an attractive proposition. The fund also boasts a dividend yield of 3.59% as of December 20, 2024, which is the highest dividend yield among the three funds reviewed.

iShares Core MSCI: Comprehensive Core Holding

For investors seeking a balanced approach that combines broad diversification with cost efficiency, the iShares Core MSCI Emerging Markets ETF NYSEARCA:IEMG is an attractive option. This fund, also managed by BlackRock, tracks the MSCI Emerging Markets Investable Market Index (IMI), which includes large-, mid- and small-cap companies, providing a comprehensive view of the emerging markets world, including South Korea.

With an expense ratio of 0.09%, IEMG is highly competitive from a cost perspective. As of December 20, 2024, the fund’s AUM was $81.80 billion, reflecting its popularity among investors. IEMG owns approximately 2,957 shares, offering a level of diversification that exceeds EEM but falls short of VWO. IEMG provides sufficient liquidity for most investors. For those looking for a core holding in emerging markets that combines broad reach and cost efficiency, IEMG is an excellent choice.

Investing in the giants of tomorrow

Emerging markets ETFs can be a valuable addition to a diversified investment portfolio, providing access to the growth potential of emerging economies. Each of the three funds we reviewed today offers unique features and meets different investment goals.

However, investors should carefully consider the risks associated with emerging markets and conduct thorough due diligence before investing. Staying informed about global economic trends and consulting with a financial advisor can help investors make informed decisions about adding emerging markets ETFs to their portfolios.

Before you consider the Vanguard FTSE Emerging Markets ETF, you should hear this.

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