Emerging Market ETFs
What makes a market 'emerging', past % returns and how to get started
👋🏼 everyone,
The first time I visited Bangalore, India, it was a city of contrasts - buzzing with scooters, nondescript buildings housing scrappy tech startups, and streets lined with food carts selling incredible tasting dosas.
Fast-forward a few years, and it felt like an entirely different place.
The skyline was dotted with sleek office towers, global tech giants had sprawling campuses, and the entire city seemed to have leveled up overnight. The transformation was immense - and it’s not just Bangalore. Stories like this are playing out across many emerging markets.
It’s easy to forget, in the day-to-day grind, that huge parts of the world are undergoing rapid, game-changing growth.
But a question I, and I think many others don’t ask themselves enough: Is my portfolio keeping up?
Most investors stick to what’s familiar: U.S. stocks, maybe a sprinkle of international funds, and a bond or two for stability. But the reality is that over 80% of the world’s population lives outside the U.S., and so does a massive chunk of global economic growth.
That’s where emerging market ETFs come in.
In the past decade, countries like India, Brazil, and Vietnam have consistently outpaced developed economies in GDP growth - some averaging 5-7% annually compared to the U.S.’s 2-3%.
Add to that the fact that emerging markets now make up over 35% of global GDP, and it’s clear, there’s opportunity in this space.
Emerging market ETFs make it simple to tap into these booming regions without the complexity of researching individual stocks.
They’re diversified, straightforward, and offer a risk-reward profile that can often complement the slower-moving, more traditional investments in your portfolio.
With all that said, let’s jump in.
I’m going to cover:
- What even constitutes an emerging market?
- The case for emerging markets
- The case against emerging markets
- How to evaluate an emerging market ETF
- Best Emerging Markets ETF (including country specific ETFs)
- Should you invest in emerging markets?
Let’s get stuck in!
What even constitutes an emerging market?
At its core, an emerging market is a country that's somewhere between "developing" and "developed."
Think of it like an economy that's growing rapidly but hasn't quite hit the level of infrastructure, income, or stability of countries like the U.S., Germany, or Japan.
What even constitutes an emerging market?
At its core, an emerging market is a country that's somewhere between "developing" and "developed."
Think of it like an economy that's growing rapidly but hasn't quite hit the level of infrastructure, income, or stability of countries like the U.S., Germany, or Japan.
These are places where industries are booming, middle classes are expanding, and consumer spending is skyrocketing - but there’s still more risk compared to developed markets because things like political instability or weaker institutions can sometimes come into play.
Examples? India, Brazil, Vietnam, and South Africa are classic emerging markets. They’ve got high growth potential (hello, 5-7% GDP growth in some cases) but aren’t quite as stable as, say, the U.K. or Canada.
These are places where industries are booming, middle classes are expanding, and consumer spending is skyrocketing - but there’s still more risk compared to developed markets because things like political instability or weaker institutions can sometimes come into play.
Examples?
India, Brazil, Vietnam, and South Africa are classic emerging markets. They’ve got high growth potential (hello, 5-7% GDP growth in some cases) but aren’t quite as stable as, say, the U.K. or Canada.
If you’re investing in emerging markets, you’re essentially betting on long-term growth in economies that are becoming major players on the global stage.
It’s like getting in on the ground floor of a company before it really takes off - but with countries instead of startups.
Why emerging markets could be your portfolio's secret weapon for growth
For starters, diversification is key.
Emerging markets often operate on different economic cycles and growth drivers compared to developed economies, which means they can offer your portfolio a bit of balance. Personally, I always keep an eye on what could go wrong in the U.S. market. Whether it’s a sudden downturn or unpredictable political changes, it’s reassuring to know that investments in other parts of the world - like emerging markets - may not move in sync with the U.S.
If something goes wrong here, those markets might hold steady or even thrive.
When you look at growth potential, countries like China, India, and Brazil are expected to outpace developed economies. According to the World Bank, emerging markets are projected to grow at an average annual rate of 4.7% in 2024, while developed markets will see just 2.1% growth. That kind of growth could translate into big opportunities for investors looking to tap into faster-growing economies.
For starters, diversification is key.
Emerging markets often operate on different economic cycles and growth drivers compared to developed economies, which means they can offer your portfolio a bit of balance. Personally, I always keep an eye on what could go wrong in the U.S. market. Whether it’s a sudden downturn or unpredictable political changes, it’s reassuring to know that investments in other parts of the world - like emerging markets - may not move in sync with the U.S.
If something goes wrong here, those markets might hold steady or even thrive.
When you look at growth potential, countries like China, India, and Brazil are expected to outpace developed economies. According to the World Bank, emerging markets are projected to grow at an average annual rate of 4.7% in 2024, while developed markets will see just 2.1% growth. That kind of growth could translate into big opportunities for investors looking to tap into faster-growing economies.
For starters, diversification is key.
Emerging markets often operate on different economic cycles and growth drivers compared to developed economies, which means they can offer your portfolio a bit of balance. Personally, I always keep an eye on what could go wrong in the U.S. market. Whether it’s a sudden downturn or unpredictable political changes, it’s reassuring to know that investments in other parts of the world - like emerging markets - may not move in sync with the U.S.
If something goes wrong here, those markets might hold steady or even thrive.
When you look at growth potential, countries like China, India, and Brazil are expected to outpace developed economies. According to the World Bank, emerging markets are projected to grow at an average annual rate of 4.7% in 2024, while developed markets will see just 2.1% growth. That kind of growth could translate into big opportunities for investors looking to tap into faster-growing economies.
For starters, diversification is key.
Emerging markets often operate on different economic cycles and growth drivers compared to developed economies, which means they can offer your portfolio a bit of balance. Personally, I always keep an eye on what could go wrong in the U.S. market. Whether it’s a sudden downturn or unpredictable political changes, it’s reassuring to know that investments in other parts of the world - like emerging markets - may not move in sync with the U.S.
If something goes wrong here, those markets might hold steady or even thrive.
When you look at growth potential, countries like China, India, and Brazil are expected to outpace developed economies. According to the World Bank, emerging markets are projected to grow at an average annual rate of 4.7% in 2024, while developed markets will see just 2.1% growth. That kind of growth could translate into big opportunities for investors looking to tap into faster-growing economies.
Emerging markets also tend to move differently from U.S. stocks, which can be helpful for managing risk. If the U.S. market hits a rough patch, emerging markets might be on a completely different trajectory, helping to reduce the overall volatility in your portfolio.
Then there’s the fact that many emerging markets are seeing major growth in sectors like technology, infrastructure, and consumer goods. Take infrastructure, for example. Developing countries need over $2 trillion a year just to keep pace with their growing economies. That’s a massive opportunity in industries like transportation, energy, and urban development, all of which are in need of investment.
And finally, valuations in emerging markets are often lower compared to developed markets, giving investors the chance to get in at more attractive prices. These markets can be more affordable, which might offer great entry points for long-term growth.
The case against emerging markets
Investing in emerging markets can be exciting, but it also comes with some significant risks that you should be aware of.
One of the biggest concerns is volatility and risk.
Emerging markets are often highly unpredictable due to factors like political instability, currency fluctuations, and underdeveloped legal systems.
Take Turkey, for example. In recent years, the Turkish lira has plummeted in value against major currencies like the dollar and euro. This is just one sign of how things can change quickly. Political instability and shifting government policies have rattled investor confidence, while inflation skyrocketed to over 70% in 2022. That kind of inflation puts serious pressure on the economy and asset prices. Add in the central bank's unpredictable interest rate decisions, and you've got a recipe for even more market swings. Despite periods of growth, Turkey’s economy has experienced slowdowns, which shows just how volatile these markets can be.
Another challenge investors face in emerging markets is liquidity issues. In some countries, there’s less market depth, meaning it could be harder to buy or sell ETFs without causing a big price movement. This becomes even more of a problem in times of high volatility, when things can turn on a dime. On top of that, currency risk is always in play. Local currencies in emerging markets can fluctuate wildly, and when this happens, it can eat into your returns - especially if your ETF is priced in U.S. dollars. For example, if the local currency drops in value, the returns from that market could shrink when converted back to dollars.
Then there's political and economic instability. Governments in emerging markets can change policies overnight, creating major shifts in market conditions. This can impact everything from trade to taxes to business regulations, leaving investors in the dark about what’s coming next. Alongside that, limited data and transparency can make it difficult to assess the true risks. Companies in these markets may not be required to disclose the same level of information as those in developed markets, making it harder to evaluate whether an investment is sound or risky. With less corporate governance, there's a higher chance that something could go wrong without warning.
A wild ride!
All in all, while emerging markets can offer high returns, they come with a lot of unknowns and you have to buckle up for a wild ride, which is demonstrated here if we look at the fluctuations of the MSCI emerging markets index, which includes companies from 24 emerging market countries, such as China, India, Brazil, South Africa, and Mexico.
How to evaluate an emerging market ETF
Performance
Start by checking how the ETF’s returns stack up against its benchmark index and similar ETFs.
For example, the iShares MSCI Emerging Markets ETF (EEM) is one of the most well-known emerging market ETFs. Over the past 5 years (as of late 2024), it has delivered an average annual return of approximately 4.2%, while its benchmark index, the MSCI Emerging Markets Index, delivered 4.5%. This indicates a small tracking difference but solid performance overall.
Expense Ratio:
Fees matter big time.
Lower-cost ETFs can have a significant impact on your long-term returns.
Here are sample expense ratios for two emerging market ETFs:
- SPDR Portfolio Emerging Markets ETF: 0.07%
- Vanguard FTSE Emerging Market ETF: 0.08%
At most, you should be paying no more than 0.7% in my experience
Diversification
Pay attention to how the ETF balances country and sector exposure. The goal is to reduce concentration risk while still giving you broad representation of emerging markets.
Liquidity
ETFs are usually easier to trade than mutual funds since you can buy and sell them instantly on an exchange - something to keep in mind for flexibility.
Risk Profile
Think about how much risk you’re comfortable with. If you prefer a steadier ride, look for ETFs designed to reduce big price swings, like the iShares Edge MSCI Emerging Markets Minimum Volatility ETF.
Many ETF names include phrases like "Minimum Volatility" or "Low Volatility."
Exposure
Check what the ETF invests in. Some, like the iShares Core MSCI EM IMI ETF, cover a wide range of companies, including smaller ones, giving you more variety.
Correlation with Developed Markets:
Make sure the ETF doesn’t move exactly like U.S. or European stocks. This way, you’re spreading out your investments and not putting all your eggs in one basket.
To check how an ETF's performance aligns with developed markets (like the U.S. or Europe), follow these steps:
- Look at the ETF's correlation stats: Many sites, like Morningstar or ETF.com, provide correlation metrics. A lower correlation (closer to 0) means the ETF behaves differently from developed market stocks, which can help with diversification.
- Compare charts: Use a tool like Yahoo Finance, Google Finance, or your brokerage platform to overlay the ETF’s performance chart with a developed market index (e.g., the S&P 500). If the lines move in sync, the ETF has a high correlation. If they move differently, there’s less overlap.
- Read analyst reports: Sites like Morningstar often mention how an ETF fits into a diversified portfolio. Look for phrases like "low correlation to U.S. equities" or "provides diversification benefits."
Best Emerging Markets ETF (including country specific ETFs)
Here I've pulled together a view of some of the best performing EM ETFs YTD and I've also, if you're curious, have listed some interesting and solid performing country specific ETFs.
Now, you might ask why a country specific EFT? Well, you might just happen to be very sold on one specific country's prospects e.g. India. A country specific ETF allows you to diversify on sector and company holding whilst still all being concentrated on that country.
Best Performing Emerging Market ETFs
High Performing Country Specific ETFs
Should you invest in emerging markets?
So, why even bother with EM?
Well, adding EM stocks to your portfolio means you’re tapping into growth in major economies like India and China, which can boost diversification.
That said, many global companies already earn a big chunk of their revenue - over 35% - from Emerging Markets. So even if you don’t directly own EM stocks, you’re still indirectly benefiting through these companies.
Looking at history, EM stocks have underperformed developed markets for decades. However, their lower valuations today could set them up for better performance in the future - it’s hard to say for sure. Interestingly, developed markets, like those in the FTSE Developed World or MSCI World ETFs, have outshone EM over the past 123 years on average.
If you want a no-fuss approach, a global ETF like the Vanguard FTSE All-World could be a great choice.
It ensures you won’t miss out if EM suddenly starts to outperform. That said, sticking with a developed-only ETF isn’t a bad move either, given its solid historical track record.
At the end of the day, it’s all about what you believe in.
Do you see EM as the growth story of the future, or are you comfortable letting global companies give you indirect exposure? Whatever you choose, the key is understanding your investments so you can stay the course, even when markets get rocky and also you need to ask yourself the serious question of how concentrated are you right now on the US market and how comfortable/uncomfortable does that make you from a risk perspective!
I hope this was a useful deep dive!
Jason
Disclaimer: This guide is for informational purposes only and does not constitute investment advice. Always conduct your own research or consult with a financial adviser to determine what’s suitable for your circumstances.