Emerging market ETFs had a great year in 2017. That may come as a surprise to some investors who were only looking at U.S. stocks, but it’s true.
Consider, for instance, that China’s benchmark Hang Seng Index is up about 35% on the year. That puts even the 18% rally for the S&P 500 to shame.
In addition to the momentum for emerging markets making them attractive, many stock market analysts wonder what’s next for America in the New Year. After all, the big rally in 2017 was based on Republicans delivering tax reform and cutting regulations, but there are no specific policies to move the needle in 2018. That means overseas ETF investments to insulate against a possible decline in U.S. markets is a good hedge.
Whether you’re bullish on emerging markets or just looking to diversify, the good news is that ETF investing provides easy access to these markets. And thanks to a variety of exchange-traded funds, you can even make tactical bets based on what you think is the best investment.
Here are seven emerging market ETFs to consider as we enter 2018.
Emerging Market ETFs to Buy: Vanguard FTSE Emerging Markets ETF (VWO)
Expense Ratio: 0.14%, or $14 annually per $10,00 invested
The Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO) is the largest emerging market fund by assets, with more than $85 billion under management. And like most exchange-traded funds from Vanguard, it is super cheap at just 0.14% in annual expenses. Not bad for a global strategy that gives access to emerging markets you may not be able to play in via a conventional brokerage account.
The fund is admittedly a bit biased towards a small group of nations and positions, however. The VWO ETF is biased towards the biggest emerging markets, with about 45% of the portfolio in China and nearby Taiwan alone. This focus is good if the region pays off, as it did in 2017, but it is not without risk.
Furthermore, the VWO fund’s top 10 positions, including high-flying Chinese internet stock Tencent Holdings Ltd (OTCMKTS:TCEHY), represent about 20% of total assets. That’s also good if it works out, but risky if it doesn’t.
Emerging Market ETFs to Buy: iShares’ MSCI Emerging Markets ETF (EEM)
Expense Ratio: 0.69%
The iShares’ MSCI Emerging Markets ETF (NYSEARCA:EEM) is a similar fund to the Vanguard emerging markets ETF, but some tweaks in its makeup are noteworthy. The differences don’t mean it’s not also worth a look for investors in 2018, however.
The EEM ETF is also very large, with more than $36 billion under management. And it too is largely invested in China with Tencent as its top holding. But practically, the fund is very different in that it is formulated to track an MSCI emerging market index instead of the FTSE one.
That means a few notable differences in holdings — the largest being the fact that South Korea is 15% of the portfolio, second only to China’s 30% weighting. Both the Vanguard VWO fund and the iShares MSCI fund are broad plays on the largest emerging markets, but the component parts are indeed different when you dig in to details.
Emerging Market ETFs to Buy: Goldman Sachs ActiveBeta Emerging Markets Equity ETF (GEM)
Expense Ratio: 0.61%
If you’d prefer to not simply buy an index fund with a fixed list of emerging market names, the Goldman Sachs ActiveBeta Emerging Markets Equity ETF (NYSEARCA:GEM) is a more active ETF that hand-picks its components based on the investment banks assessment of a stock’s “good value, strong momentum, high quality and low volatility.”
That manifests itself in a very different makeup than other ETFs; right now, Alibaba Group Holding Ltd (NYSE:BABA) and Samsung are both top holdings that both the VWO and EEM funds haven’t prioritized. It’s tactical allocations like this that theoretically fuel outperformance, so long as the managers at Goldman are making wise picks, of course.
The downside risk is that they pick the wrong stocks or regions, and you do worse than an index fund.
Emerging Market ETFs to Buy: Guggenheim MSCI Emerging Markets Equal Country Weight ETF (EWEM)
Expense Ratio: 0.75%
What if you want to play emerging markets, but aren’t sure which countries you should be biased towards and which ones you should try to avoid? Then let the Guggenheim MSCI Emerging Markets Equal Country Weight ETF (NYSEARCA:EWEM) take the guesswork out of the equation.
A twist on the previously mentioned iShares EEM fund, this ETF uses the same index but requires all countries to be equally represented in the portfolio — 4% of assets in greater China and Hong Kong, 4% for India, 4% for Brazil … you get the idea.
The approach helps smooth out volatility if one region has a bad run. But the drawback is that if one country is hot, the fund cannot put more money into that opportunity.
Emerging Market ETFs to Buy: iShares MSCI Minimum Volatility Emerging Markets ETF (EEMV)
Expense Ratio: 0.69%
Another approach to emerging markets that could smooth out the bumps along the road is the iShares MSCI Minimum Volatility Emerging Markets ETF (BATS:EEMV). As the name implies, the strategy of this fund involves investments in faster-growing nations but with an eye towards keeping risk relatively low.
The EEMV fund does this primarily through sector allocations, while tech and finance companies still play a big role, as in other funds, the top picks tend to be more entrenched companies. Case in point: $190 billion chipmaker Taiwan Semiconductor Manufacturing makes the top five. There also is more attention paid to low-risk industries that provide reliable cash flows, like telecommunications via plays such as Taiwan’s $26 billion Chunghwa Telecom Co., Ltd (ADR) (NYSE:CHT).
Emerging Market ETFs to Buy: SPDR S&P Emerging Markets Dividend ETF (EDIV)
Expense Ratio: 0.49%
Speaking of entrenched emerging markets plays, what if you’re looking to play the biggest names in these regions for long-term returns and potential income? If you are, take a look at the SPDR S&P Emerging Markets Dividend ETF (NYSEARCA:EDIV).
The fund delivers a roughly 3.8% yield right now, which is almost twice what the typical domestic large-cap fund will pay you right now.
An added plus for risk-averse investors looking for long-term returns: EDIV rebalances regularly with a mandate that no single company can be allocated at more than 3% of the total portfolio.
Emerging Market ETFs to Buy: iShares MSCI Frontier 100 ETF (FM)
Expense Ratio: 0.79%
Of course, you may be wondering why we still consider China an emerging market when it’s second only to the U.S. in terms of GDP. Isn’t the biggest opportunity in a region like this mostly in the rear-view mirror?
If you’d prefer to get in on the ground floor of the next generation of emerging markets, then consider the iShares MSCI Frontier 100 ETF (NYSEARCA:FM).
The top three regions targeted by this fund are Kuwait, Argentina and Vietnam — smaller and much more volatile nations, yes, but also ones that theoretically have the highest ceiling for future growth. This is a much more aggressive play, but potentially a more rewarding one.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at [email protected] or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.