Emerging market ETFs: My top 5 emerging market ETFs
Emerging market ETFs are a fascinating but challenging investment option for many investors. These markets offer the potential for high returns, but they also come with increased risks. In this article, I present my top ETFs for emerging markets, which you can easily invest in via a savings plan or a one-off investment.
In brief:
- Emerging markets offer high returns but are associated with increased risks such as political instability and currency volatility.
- Emerging markets are experiencing faster economic growth and offer investors unique opportunities thanks to growing middle classes and increasing urbanisation.
- A 50/50 split between MSCI World and Emerging Markets can be a balanced investment strategy to benefit from the stability of developed markets and the growth potential of emerging markets.
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What are emerging market ETFs?
Emerging markets, also known as emerging economies, are economies that are in a transitional stage from developing countries to industrialised and developed economies. These countries are characterised by rapid economic growth, a growing middle class and rising consumption.
Well-known examples of emerging markets are China, India, Brazil, Russia and South Africa, but countries such as Mexico, Indonesia and Turkey also belong to this category.
Investing in emerging markets is attractive because these markets often offer the potential for above-average growth rates. While industrialised countries such as the United States and Germany are already highly developed and largely stable markets, many emerging markets are still in a dynamic growth phase.
This offers investors the opportunity to benefit from economic growth and rising demand for consumer goods and services in these regions.
The following table provides an overview of the most important emerging markets. It contains key economic indicators such as gross domestic product (GDP), GDP growth, population size and inflation rate for 2023. These indicators are crucial for investors who want to assess the potential and risks of investing in these emerging markets.
| Country | GDP (nominal, billion USD, 2023) | GDP growth (2023) | Population (millions, 2023) | Inflation (2023) |
| China | 17.700 | 5.2% | 14101 | 2.1% |
| India | 3.740 | 6.1% | 1425 | 5.9% |
| Brasil | 2.080 | 2.9% | 214 | 4.7% |
| South Africa | 377 | 1.3% | 60 | 6.2% |
| Russia | 1.840 | -2.1% | 143 | 3.7% |
| Mexico | 1.320 | 3.1% | 126 | 5.1% |
| Indonesia | 1.400 | 5.0% | 277 | 3.5% |
| Turkey | 830 | 3.0% | 85 | 54.8% |
| Malaysia | 410 | 4.5% | 33 | 2.2% |
| Thailand | 570 | 3.4% | 70 | 1.8% |
Why are emerging markets interesting for investors?
Emerging markets offer unique opportunities for investors. These economies tend to grow faster than developed markets, which means potentially higher returns. A growing middle class and increasing urbanisation in countries such as China and India are creating huge markets for consumer staples, services and technology products.
Many emerging markets are also rich in natural resources. Countries such as Brazil and Russia benefit from large deposits of raw materials such as oil, gas and metals.
Good to know:
What are emerging markets? Emerging economies with high growth potential, but also increased risks such as political instability and currency volatility.
These resources are not only important for the domestic economy, but also make these countries key players in the global economy. With the growing demand for raw materials in developed countries, emerging economies are set to continue benefiting greatly in the coming decades.
Another reason why emerging markets are attractive to investors is diversification. Emerging economies often have different economic structures and develop independently of the markets in the US and Europe. This means that investing in these markets can help spread the risk of a portfolio and make it more resilient to global economic turmoil.
Are there any specific risks and problems associated with emerging markets?
Although emerging markets offer great opportunities, they also involve specific risks that investors should not ignore. These risks can have a significant impact on the performance of investments in emerging market ETFs:
Political instability: Many emerging markets have political systems that are less stable than those of developed markets. Political unrest, changes in government or sudden changes in economic policy can have a significant impact on the markets of these countries. Corruption and unpredictable political decisions can shake investor confidence and lead to capital outflows.
Currency risks: Emerging market currencies are often more volatile than those of developed countries. Exchange rate fluctuations can significantly affect investment returns. If a currency depreciates sharply, this can significantly reduce the return on an otherwise profitable investment. Investors in emerging market ETFs need to be aware of this risk and may consider currency hedging.
Dependence on raw materials: Many emerging economies are heavily dependent on the production and export of raw materials. Brazil, Russia and South Africa are examples of countries whose economies are heavily dependent on raw material exports. Fluctuations in raw material prices can therefore have a significant impact on these economies. A slump in raw material prices can lead to an economic crisis, which also has a negative impact on the stock markets.
Regulatory risks: Government intervention plays a major role in some emerging markets, particularly in China. Governments can suddenly enact new laws and regulations that have a negative impact on companies and markets. In recent years, for example, China has introduced strict regulatory measures that have hit large technology companies such as Tencent and Alibaba particularly hard. Such regulatory intervention can pose unpredictable risks for investors.
China: A special case among emerging markets
China is the largest emerging market and plays a central role in every emerging markets ETF. Over the past few decades, China has experienced impressive economic growth and has become the world’s second-largest economy. Chinese companies such as Tencent, Alibaba and Huawei are global market leaders and dominate the technology and consumer goods industries worldwide.
Despite this success story, the Chinese stock market has suffered significant setbacks in recent years. One of the main reasons for this is the Chinese government’s strict regulatory measures, which have hit large technology companies particularly hard. These measures aim to control the growth and power of these companies while promoting social stability and economic equality.
In addition to regulatory challenges, China’s economic growth has slowed, partly due to the trade conflict with the US and the impact of the COVID-19 pandemic. These factors have shaken investor confidence and led to the Chinese stock market underperforming compared to developed markets.
Good to know:
Opportunities and risks Emerging markets offer high returns, but also specific risks such as political instability and dependence on raw materials.
Despite these challenges, China remains a market with immense potential. Its huge and growing middle class, increasing urbanisation and strong focus on innovation and technology offer great opportunities for investors in the long term. For investors willing to take the risks, China and Asia ETFs could continue to be a worthwhile investment.
My top 5 emerging market ETFs: high returns are possible
For investors who want to benefit from the growth potential of emerging markets, ETFs are an excellent way to invest in these markets in a broadly diversified manner. Here are five of the best emerging market ETFs you should consider:
1. iShares MSCI Emerging Markets ETF
| Name | iShares MSCI Emerging Markets ETF |
| ISIN | US4642872349 |
| Volume | 74 billion USD |
| dividend | Accumulative |
| Costs | 0.68% p.a. |
| Top-Holdings | Percentage share |
| Taiwan Semiconductor Mfg. Co. | 6,54 |
| Tencent Holdings Ltd. | 4,89 |
| Samsung Electronics Co. | 3,82 |
| Alibaba Group Holding Ltd. | 3,29 |
| Meituan Dianping | 1,65 |
The iShares MSCI Emerging Markets ETF is one of the largest and best-known ETFs in the emerging markets sector. With a broad portfolio spanning various sectors and regions, this ETF offers excellent diversification. Its largest positions are in technology-strong countries such as Taiwan, China and South Korea.
2. Vanguard FTSE Emerging Markets ETF
| Name | Vanguard FTSE Emerging Markets ETF |
| ISIN | US9220428588 |
| Volume | 84 billion USD |
| dividend | Distributing (2.50% in 2023) |
| Costs | 0,08 % p.a. |
| Top-Holdings | Percentage share |
| Taiwan Semiconductor Mfg. Co. | 6,98 |
| Tencent Holdings Ltd. | 5,02 |
| Samsung Electronics Co. | 4,21 |
| Alibaba Group Holding Ltd. | 3,82 |
| Reliance Industries Ltd. | 1,4 |
The Vanguard FTSE Emerging Markets ETF is known for its low costs (TER) and broad diversification. The ETF covers a wide range of sectors and countries, with a particular focus on technology and consumer goods companies in Asia. With a dividend yield of 2.50% in 2023, it also offers an attractive distribution.
3. Schwab Emerging Markets Equity ETF
| Name | Schwab Emerging Markets Equity ETF |
| ISIN | US8085247069 |
| Volume | 13 billion USD |
| dividend | Distributing (2.10% in 2023) |
| Costs | 0,11 % p.a. |
| Top-Holdings | Percentage share |
| Taiwan Semiconductor Mfg. Co. | 6,8 |
| Tencent Holdings Ltd. | 4,89 |
| Samsung Electronics Co. | 4,1 |
| Alibaba Group Holding Ltd. | 3,25 |
| Meituan Dianping | 1,55 |
The Schwab Emerging Markets Equity ETF is particularly attractive to cost-conscious investors as it offers one of the lowest expense ratios in this segment. Despite its low costs, diversification remains strong, with a high proportion of technology stocks. With a dividend yield of 2.10% in 2023, it also provides a solid source of income.
4. SPDR S&P Emerging Markets ETF
| Name | SPDR S&P Emerging Markets ETF |
| ISIN | US78463X5095 |
| Volume | 9 billion USD |
| dividend | Distributing (2.30% in 2023) |
| Costs | 0,11 % p.a. |
| Top-Holdings | Percentage share |
| Taiwan Semiconductor Mfg. Co. | 6,5 |
| Tencent Holdings Ltd. | 4,5 |
| Samsung Electronics Co. | 3,8 |
| Alibaba Group Holding Ltd. | 3,35 |
| Ping An Insurance Co. | 1,45 |
The SPDR S&P Emerging Markets ETF offers a balanced mix of large and medium-sized companies, as well as small caps in emerging markets. This ETF is particularly suitable for investors seeking broad sector diversification. With a dividend yield of 2.30% in 2023, investors can also benefit from regular distributions. By way of comparison, my top 10 dividend ETFs pay out up to 7% in dividends per year!
5. Invesco MSCI Emerging Markets ETF
| Name | Invesco MSCI Emerging Markets ETF |
| ISIN | US46138E6111 |
| Volume | 5 billion USD |
| dividend | Accumulative |
| Costs | 0,25 % p.a. |
| Top-Holdings | Percentage share |
| Taiwan Semiconductor Mfg. Co. | 7 |
| Tencent Holdings Ltd. | 4,95 |
| Samsung Electronics Co. | 4,05 |
| Alibaba Group Holding Ltd. | 3,55 |
| Naspers Ltd. | 1,6 |
The Invesco MSCI Emerging Markets ETF focuses on companies included in the MSCI Emerging Markets Index. This ETF offers a high weighting in technology stocks and is attractive to investors who want to invest in emerging markets with a strong focus on technology.
My strategy for emerging market ETFs: How I invest
Given the current market conditions, I have opted for a 50/50 split between the MSCI World and the MSCI Emerging Markets ETF. While the MSCI World, which covers companies from developed markets, is considered safer due to its established companies and market stability, the P/E ratio of around 22 could represent an expensive valuation. This suggests that future returns may be limited as stocks are already highly valued.
On the other hand, emerging markets, as represented by the MSCI Emerging Markets ETF, offer a P/E ratio of 15.7. This more favourable valuation could point to potentially higher returns, especially over a longer investment horizon. My strategy aims to benefit from both the stability and proven returns of developed markets and to take advantage of the significant growth potential of emerging markets.
The chart above shows a comparison of returns between MSCI World (blue) and MSCI World Emerging Markets (red).
I recommend this balanced strategy because it spreads the risk between the more stable developed markets and the more promising but volatile emerging markets. A long-term investment horizon is crucial in order to weather the fluctuations in the emerging markets and exploit their full growth potential.
Good to know:
Recommended investment strategy A 50/50 split between MSCI World and Emerging Markets ETFs can combine stability and growth potential.
In addition, I recommend regularly reviewing the weighting between the MSCI World and the MSCI Emerging Markets. In the event of market changes, it may be advisable to rebalance the weighting in order to optimally adapt your global ETF portfolio to current developments.
Conclusion: Invest in the best emerging market ETFs and benefit from high returns through emerging markets.
Emerging market ETFs offer significant long-term growth opportunities, particularly for investors who are willing to accept the higher risk associated with these markets. Despite recent underperformance relative to developed markets, the potential for above-average returns in emerging markets remains high.
The lower P/E ratio compared to developed markets suggests that these markets are currently more attractively valued, which could represent an attractive opportunity for long-term investors.
Choosing the right emerging market ETF is crucial to optimally exploiting the potential of these markets. A balanced approach that focuses on both the MSCI World and emerging markets can deliver stable, high returns over the long term. With a long-term investment horizon and a diversified portfolio strategy, you can optimally leverage the opportunities and risks in emerging markets and benefit from their future growth.
If you are looking for a broker with whom you can trade emerging market ETFs at low cost, then take a look at my reviews of Trade Republic, Freedom24 and Scalable Capital, or compare the brokerage accounts of Trade Republic and Scalable Capital.
FAQ – Frequently asked questions about the Emerging Markets ETF
