Whether you are looking for a momentum play or smart tool for diversification, now is a great time to look at emerging markets ETFs.
After a very negative 2014 (the average diversified emerging markets fund had a 4.8% price decline), 2015 started strong and may prove to keep the positive energy going longer.
Just in the past month, the average emerging markets ETF jumped 10%.
But this strong performance isn’t a big surprise if you think of the nations that are considered to be “emerging” or “developing” and how stocks in those countries are performing now. The largest emerging countries include China, India, and Brazil. Smaller emerging countries include South Korea, Saudi Arabia and Mexico.
Leading the way in performance for 2015 is China. As I shared in the recent post on the best funds investing in Chinese stocks, recent enthusiasm for Chinese stocks stems from an easy money policy by the People’s Bank of China (PBOC), which appears ready for further easing, if necessary, to keep China’s economy humming.
Also, a strong dollar is boosting emerging markets exporters in general. If you’re looking to add exposure to emerging markets, here are three of the best emerging market ETFs to get the job done.
Best Emerging Market ETFs: iShares MSCI Emerging Markets Indx (EEM)
Highly traded and with more than $32 billion in assets, iShares MSCI Emerging Markets (NYSEARCA:EEM) is the most liquid emerging market ETF you can buy.
EEM provides market-cap-weighted exposure to equities from 23 emerging markets countries with top holdings coming from China, South Korea, Taiwan and South Africa.
EEM is up 9% year-to-date, which is ahead of the average diversified emerging markets fund. One of the few ETFs with a history of more than 10 years, the fund’s 10-year annualized return is 7.7%.
One slight drawback of EEM is its expense ratio of 0.68% — or $69 for every $10,000 invested — which is high compared to other ETFs in the emerging markets category.
Best Emerging Market ETFs: Vanguard Emerging Markets Stock Index Fd (VWO)
For a solid low-cost emerging market ETF, take a look at Vanguard FTSE Emerging Markets (NYSEARCA:VWO).
This ETF tracks the FTSE Emerging Index, which includes large- and mid-cap securities from advanced and secondary emerging markets.
VWO fared better than most emerging markets ETFs in 2014 with a flat return of -0.07%, and it’s up with the best in the pack in 2015 with a 9.3% year-to-date gain.
The long-term history is more than solid with an 8.1% 10-year annualized return, which places it ahead of 99% of the category.
In true Vanguard fashion, the expense ratio of 0.15% is rock-bottom for emerging market ETFs.
Best Emerging Market ETFs: SPDR S&P Emerging Markets (ETF) (GMM)
Another solid emerging markets ETF with a long history of consistent performance is SPDR S&P Emerging Markets (NYSEARCA:GMM).
GMM seeks to match the total returns, before fees and expenses,of the S&P Emerging BMI Index.
Like most emerging markets funds, GMM can be volatile with significant price swings that are more pronounced than a developed country stock index, such as the S&P 500, but this ETF maintains a below-average standard deviation for the category while performance remains comfortably above-average in the 1-year and 5-year periods.
The portfolio consists primarily of large-cap stocks with heaviest exposure to China and other developing Asian countries.
The expense ratio of 0.59% is a bit high for an emerging market ETF, but the solid performance history may justify the cost.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.
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