Low-cost, broadly diversified, index-tracking funds have historically produced outstanding outcomes for investors. Many of these funds across various Morningstar Categories receive our highest Morningstar Analyst Ratings, as we expect they will continue to deliver superior risk-adjusted outcomes. At present, the application of a market-cap-weighted approach to emerging markets results in a quirk. All of these cap-weighted index trackers have roughly one third of their assets parked in stocks from China, which disrupts their geographic diversification. As a result, low-cost, cap-weighted emerging-markets funds from Vanguard, iShares, and Schwab all carry Bronze ratings--an indication that we still have a favorable of view these strategies but have less confidence in their ability to perform well against their peers.
A bias toward China, or any country for that matter, ties a larger portion of these funds to stocks from a single region and denominated in a single currency. But there are a few funds in the emerging-markets category that stand out for controlling this country/currency concentration or take a long-term focus on reducing risk.
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Daniel Sotiroff does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.