3 Great Emerging-Markets ETFs

Dan Sotiroff: Passive investments in the diversified emerging-markets category typically don’t earn the same high marks as they do in other categories. Much of the reason is that this is one of the few categories where active managers typically have the upper hand.

But there are some good index-tracking options to consider for the long run.

3 Great Emerging-Markets ETFs

1. iShares MSCI Emerging Markets Min Vol Factor ETF EEMV
2. Vanguard Emerging Markets ETF VWO
3. iShares Core MSCI Emerging Markets ETF IEMG

The first emerging-markets ETF is Silver-rated iShares MSCI Emerging Markets Min Vol Factor ETF, which trades under the ticker EEMV.

Stocks listed in emerging markets are usually riskier than their developed-markets counterparts for a variety of reasons. But EEMV takes some of the edge off by systematically targeting less risky stocks and combining them in a way that’s designed to cut back on volatility. That means it tends to outperform the broader emerging-markets universe during drawdowns, but it will likely underperform during bull markets.

Over the long run, that give and take tends to wash out. Its long-term total return tends to mimic the market with about 20% less risk. The consistency with which it has done that bodes well for its future risk-adjusted performance.

The next two ETFs for today are similar in a lot of ways with one important difference. Bronze-rated Vanguard Emerging Markets ETF, ticker VWO, and Bronze-rated iShares Core MSCI Emerging Markets ETF, ticker IEMG, both capture the entire emerging-markets universe for less than 10 basis points per year in fees.

Despite those similarities, each ETF applies a slightly different filter to the markets that it classifies as emerging. VWO does not include Korean stocks in its portfolio because it tracks an index from FTSE that classifies South Korea as a developed market. At the same time, IEMG includes Korean stocks because they meet MSCI’s emerging-market criteria.

One is not better than the other. Both are great long-term options, but this is an important distinction to consider when matching these ETFs to other developed-markets mutual funds or ETFs that you may hold in your portfolio. As a general rule, each ETF should be paired with its developed-markets counterpart. That means VWO should be matched with an ETF that’s tracking a FTSE index, and IEMG plays best with one tracking an MSCI index. That will prevent overweighting or underweighting Korean stocks in your broader investment portfolio and help you get the most their diversification potential.

Watch “3 Recent Standout ETFs to Avoid” for more from this series.