In most cases, investors will pay a bit more to own international equity exchange-traded funds (ETFs) than domestic equity funds. That does not mean international ETFs, including emerging markets ETFs, have to come with high fees.
The fee war that permeates the ETF industry has long since made its way to emerging markets funds. Gone are the days when investors were forced to pay triple, quadruple or more in annual expense ratios on emerging markets ETFs compared to domestic equity funds.
These days, there are plenty of low-cost emerging markets ETFs to consider, several of which charge less than 0.2% per year.
Now could be an ideal time to consider cheap emerging markets ETFs. With the dollar weak, emerging markets fundamentals improving and earnings growth resurgent, emerging markets stocks could post another solid year in 2018.
The following low-cost emerging markets ETFs are fine ideas for cost-conscious investors.
Expense ratio: 0.14% per year, or $14 on a $10,000 investment.
The iShares Core MSCI Emerging Markets ETF (NYSEARCA:IEMG) is one of the kings among cheap emerging markets. Originally created just over five years ago as a low-cost alternative to the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM), IEMG has taken on a life of its own as highlighted by nearly $50 billion in assets under management.
“Rather than valuations or the dollar, the best case for EM equities ties back to global growth,” said BlackRock.
“Although global GDP is difficult to measure in real time, historically, changes in industrial metal prices have been a reliable proxy. If emerging markets are a levered play on global growth, they should be more inclined to outperform when industrial commodities are rising. Historically, this is exactly what has happened.”
IEMG holds 1,912 stocks and allocates about 29% of its weight to China. This low-cost emerging markets ETF is up about 8% year-to-date.
Expense ratio: 0.14% per year
The Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO) is the king among emerging markets ETFs, cheap funds or otherwise. Home to $73.7 billion in assets under management, VWO is by far the largest emerging markets ETF with nearly 50% more in assets over IEMG. In fact, VWO is the second-largest U.S.-listed international equity ETF and the sixth-largest ETF of any stripe trading in New York.
In addition to its low fee, VWO sports another Vanguard hallmark — a massive number of holdings. In this case of this low-cost emerging markets ETF, the roster checks in at a staggering 4,734 components.
VWO does not include South Korean stocks, meaning elevated weights to other developing economies. For instance, China accounts for nearly a third of the fund’s weight while India is also overweighted here relative to the MSCI benchmark.
Annual fee: 0.11%
The SPDR Portfolio Emerging Markets ETF (NYSEARCA:SPEM) is over 10 years old, but the ETF was rebranded last year as part of a new suite of low-cost SPDR core ETFs. For the time being, the SPDR is the least expensive emerging markets in the U.S. with an annual fee of just 0.11%.
Like VWO, SPEM does not include South Korean stocks, meaning elevated positions in some of the other large developing economies.
Over the past year years, SPEM has outperformed VWO by 370 basis points, but the SPDR has also slightly trailed the MSCI Emerging Markets Index over that period. The same is true of SPEM’s three-year returns.
SPEM holds almost 1,250 stocks with a weighted average market capitalization of $91.5 billion. Nearly 34% of the fund’s geographic exposure is tied to Chinese stocks.
Expense ratio: 0.13% per year
The Schwab Emerging Markets Equity ETF (NYSEARCA:SCHE) is the silver medalist when it comes to cheap emerging markets ETFs, trailing only the aforementioned SPEM regarding lowest annual expense ratio.
SCHE tracks a FTSE index that is comparable to the one VWO follows, but the benchmarks are not twins as evidenced by the Schwab ETF holding 886 stocks. Large- and mega-cap stocks combine for 88% of SCHE’s weight with mid-caps making up the rest of the portfolio.
While it may be tempting to pinch pennies with SCHE compared to IEMG, that strategy has not worked over the past three years as the iShares fund is beating is Schwab rival by 350 basis points.
Plus, the cheaper SPEM has topped this low-cost Schwab fund over that span. All three cheap emerging markets ETFs have displayed similar volatility metrics over that period.
Expense ratio: 0.25% per year
The combination of smart beta and emerging markets can imply higher fees, but the iShares Edge MSCI Min Vol Emerging Markets ETF (Cboe:EEMV) is reasonably priced at 0.25% per year.
As a low volatility fund, EEMV has a smaller roster than traditional emerging markets ETFs with just under 270 stocks. The low volatility requirement also leads to some differences at the country level with China, Taiwan and South Korea combining for 52% of the fund’s weight.
Conversely, EEMV has light or no allocations to some of historically higher beta emerging markets. For example, Brazil is EEMV’s smallest country weight and the fund features no exposure to Russian stocks.
Annual fee: 0.32%
The WisdomTree Emerging Markets Quality Dividend Growth Fund (NASDAQ:DGRE) is one of the cheapest emerging markets dividend ETFs around, meaning it is also cost-effective among emerging markets smart beta funds.
DGRE tracks the WisdomTree Emerging Markets Quality Dividend Growth Index. That benchmark combines growth and quality metrics.
“The growth factor ranking is based on long-term earnings growth expectations, while the quality factor ranking is based on three-year historical averages for return on equity and return on assets,” said WisdomTree. “Companies are weighted in the Index based on annual cash dividends paid.”
India is DGRE’s largest country allocation at 15.8%, a significant overweight relative to the MSCI Emerging Markets Index. Likewise, DGRE devotes just 12% of its weight to China, a significant underweight compared to traditional emerging markets funds.
Expense ratio: 0.39%
The Schwab Fundamental Emerging Markets Large Company Index ETF (NYSEARCA:FNDE) is another low-cost emerging markets ETF that is a fundamentally-weighted (smart beta) fund.
This $1.9 billion fund tracks the Russell RAFI Emerging Markets Large Company Index, which “utilizes three fundamental measures of company size: retained operating cash flow, adjusted sales, and dividends plus buybacks,” according to Schwab.
Obviously, FNDE carries a higher fee than some of the cap-weighted options highlighted here, but the Schwab fund justifies that fee. Over the past three years, FNDE is up 44.6% compared to 34.1% for the MSCI Emerging Markets Index.
As is the case SCHE, investors can realize additional cost savings with FNDE by trading the ETF commission-free on the Schwab ETF OneSource platform.
As of this writing, Todd Shriber was long VWO.