Should you invest in emerging markets ETFs?
The main benefit of investing in emerging markets is the potential for less correlated returns that can buoy a portfolio when U.S. or developed markets are lagging, along with favorable demographic tailwinds that could lead to higher-than-average future growth.
With emerging markets, it's a good idea to consider a fund or exchange-traded fund (ETF) to gain broad exposure rather than picking one or two developing economies. It's always wise to talk to a regulated financial adviser before investing to develop an investment strategy and ensure a diversified portfolio.
When basic caution is exercised, the rewards of investing in an emerging market can outweigh the risks. Despite their volatility, the most growth and the highest-returning stocks are going to be found in the fastest-growing economies.
- Vanguard FTSE Emerging Markets ETF (VWO).
- iShares Core MSCI Emerging Markets ETF (IEMG).
- Schwab Emerging Markets Equity ETF (SCHE).
- SPDR Portfolio Emerging Markets ETF (SPEM).
Consider EM bonds carefully
Among the opportunities in the fixed income markets in 2024, local-currency EM bonds may be one to consider for investors with a higher risk tolerance. The relatively high yields and likelihood of rate cuts by global central banks have created a tactical investment opportunity.
Factors to consider before you invest
Investing in emerging market ETFs can sometimes be risky, as emerging markets can see a steep fall at times. Emerging markets can sometimes be heavily influenced by global developments, thus, making them much volatile.
Because emerging markets are viewed as being riskier, they have to issue bonds that pay higher interest rates. The increased debt burden further increases borrowing costs and strengthens the potential for bankruptcy. Still, this asset class has left much of its unstable past behind.
A third consecutive monthly acceleration in global output growth was supported by faster emerging market expansion while developed markets also returned to growth for the first time in six months.
Vanguard's active fixed income team believes emerging markets (EM) bonds could outperform much of the rest of the fixed income market in 2024 because of the likelihood of declining global interest rates, the current yield premium over U.S. investment-grade bonds, and a longer duration profile than U.S. high yield.
Of course, EM equity markets have delivered disappointing returns over the last 10 years. But rewind further to the first decade of the 21st century, and EM stocks outperformed the S&P 500 by a wide margin. Over the longer run since 2001, EM stocks have outpaced the MSCI World.
What is the largest emerging market ETF?
However, they also offer the potential for higher returns due to their growth prospects. The largest emerging markets ETF is Vanguard FTSE Emerging Markets ETF (VWO), with $72.2 billion in assets as of December 8, 2023.
| ETF | Assets Under Management | Expense Ratio |
|---|---|---|
| Vanguard Information Technology ETF (VGT) | $70 billion | 0.10% |
| VanEck Semiconductor ETF (SMH) | $16.3 billion | 0.35% |
| Invesco S&P MidCap Momentum ETF (XMMO) | $1.6 billion | 0.34% |
| SPDR S&P Homebuilders ETF (XHB) | $1.8 billion | 0.35% |
The largest Aggressive ETF is the iShares Core Aggressive Allocation ETF AOA with $1.81B in assets. In the last trailing year, the best-performing Aggressive ETF was AOA at 12.47%. The most recent ETF launched in the Aggressive space was the iShares ESG Aware Aggressive Allocation ETF EAOA on 06/12/20.
Rebuilding resilience
Moreover, medium-term growth in most emerging markets is projected to remain strong. However, a collective global effort is crucial for emerging markets to realize their growth potential and generate much-needed dynamism in global activity, trade, investment, and finances.
In short, a review of the three standard approaches to EM allocation suggest global equity investors should allocate somewhere in the range of 13% to 39% to EM. Source: FactSet, MSCI, MSIM calculations.
Why is EM debt attractive? Emerging market debt offers potentially higher returns due to the greater level of risk associated with investing in rapidly growing and sometimes politically unstable countries.
One reason for its underperformance was China. The MSCI Emerging Markets index returned 9.8% in 2023 versus 20% for the MSCI Emerging Market ex-China index, as the world's second-largest economy continued to struggle.
Too much diversification can dilute performance
Adding new ETFs to a portfolio that includes this Energy ETF would decrease its performance. Since the allocation to the Energy ETF will naturally decrease - and so will its contribution to the total portfolio return.
Corruption: Corruption is a common problem in many emerging market economies and can create challenges for businesses in areas such as licensing, permits, and customs clearance. Political instability: Emerging markets are often characterized by political instability, which can make it difficult to do business.
If a US recession is on the way would only make more of a case for greater diversification in global portfolios – a positive for emerging markets. A recession would entail lower inflation and, as a result, lower US interest rates.
What is the outlook for emerging markets?
The positive outlook for Emerging Market (EM) investments took a hit in 2023. Initially, investors were excited about the prospect of a stronger Chinese economy, a weaker US dollar, and lower expected interest rates. Unfortunately, these expectations didn't quite pan out, leading to lower returns.
A strong U.S. dollar generally harms the economies of emerging nations. Emerging markets are reliant on foreign investment and foreign capital, both of which can evaporate when the dollar gains in value.
| Stock | 2024 return through March 31 |
|---|---|
| Janux Therapeutics Inc. (JANX) | 250.9% |
| Trump Media & Technology Group Corp. (DJT) | 254.1% |
| Super Micro Computer Inc. (SMCI) | 255.3% |
| Viking Therapeutics Inc. (VKTX) | 340.6% |
- eCommerce.
- Online education.
- The health and fitness industry.
- The home improvement industry.
- The pet care industry.
- Travel and tourism.
- Invest in your future.
- Get a loan and start your business.
The growth narrative for EMs has improved marginally compared to our previous economic outlook, in November. Our 2024 real GDP growth forecast for EMs excluding China is 3.9%, (from 3.8% previously), broadly unchanged from 4.0% growth in 2023.
