Complete Guide to Emerging Market ETFs

If you’ve kept your money in the US this year, you’ve missed out. Despite the recent uptick in US equities, the major American averages are barely up for the year. Meanwhile emerging market shares have seen a heroic rally from the depths of last year, with the benchmark MSCI Emerging Market Index up 38% ytd. Many individual markets – Russia, Taiwan, China, Brazil and India – are up nearly 50% ytd. Even the idea of decoupling – ridiculed late last year – is making a comeback.pic32

Despite these gigantic gains, there is still time to profit from emerging markets. The major averages still aren’t anywhere near their 2008 highs. And the shift from the West to the emerging world is a long term trend that will take decades to unfold. With the US dollar steadily losing its value, and Europe and Japan in terminal demographic and economic decline, emerging markets are the logical place to invest for the future.

This guide will review all 16 US-listed ETFs that track multiple global emerging markets, including 13 equity funds, 2 fixed income funds, and 1 currency fund. Later guides will review regional, sector, individual country, leveraged, and short ETFs that also have emerging market exposure.

Broad Market

BLDRS Emerging Markets 50 ADR Index Fund (ADRE) +35.08% & .59 vol

Brazil 25% | China 12% | Taiwan 9% | Hong Kong 9% | South Korea 8%

The ADRE invests in the ADRs of about 50 widely traded emerging market companies. It is broadly diversified across sectors, but its index formulation allows for significant geographical concentration with Brazil currently above a 25% weighting. Because it invests only in ADRs the fund may miss out on stocks not listed in the US. And 50 stocks is hardly enough for a fund that aims to track 40% of the world’s economy. Its strategy does, however, lead to a very good expense ratio of just .30%.

iShares MSCI Emerging Markets Index (EEM) +34.43% & 67.82 vol

China 16% | Brazil 14% | South Korea 13% | Taiwan 12% | South Africa 9%

The EEM is one of the largest ETFs in the world, investing its 12 billion in assets in a broad emerging market index that is widely spread across countries and sectors. It would be a tempting choice, but the VWO tracks the same index, has a much lower expense ratio, and also has great liquidity.

Powershares FTSE RAFI Emerging Markets Portfolio (PXH) +30.43% & .14 vol

South Korea 25% | China 22% | Taiwan 11% | Brazil 11% | Russia 7%

The PXH tracks an emerging market index that is rebalanced annually to reflect a certain fundamentals-based formula. The prospectus doesn’t exactly spell out what that formula is, but it certainly hasn’t helped this index which has underperformed its peers year to date. Its high expense ratio and lack of good volume make this one an easy fund to look past. And who can justify South Korea as one quarter of an “emerging market” fund?

SPDR S&P Emerging Markets (GMM) +36.50% & .01 vol

China 21% | Brazil 17% | Taiwan 11% | South Africa 9% | India 9%

The GMM has one great advantage over its competitors: it excludes South Korea from its index. Despite MSCI’s insistence, South Korea is not really an emerging market. Its an OECD member, and has a per capita GDP higher than New Zealand. Its companies are large global conglomerates (Samsung, Hyundai, Kia) heavily exposed to developed markets, and its sharemarket has consequently underperformed its emerging peers. GMM’s wide geographic distribution, numerous holdings, and competitive expense ratio would make it a serious contender if its volume ever takes off. It is currently the least traded of any emerging market ETF, and thus has very serious liquidity concerns.

Vanguard Emerging Markets (VWO) +38.99% & 5.44 vol

China 18% | Brazil 15% | South Korea 14% | Taiwan 12% | South Africa 7%

Vanguard’s VWO is not only the best performing total emerging market fund to date, its also the cheapest. Its .29 percent expense ratio is a huge relief from the EEM’s .79%,. And not only does the VWO track the same index as the iShares offering, it also tracks it better with double the number of EEM’s holdings. The VWO is a fund that belongs in everyone’s portfolio.


Claymore BNY Mellon BRIC (EEB) +48.52% & .30 vol

Brazil 52% | China 36% | India 8% | Russia 4%

BRIC funds are popular investment vehicles that track the four largest emerging economies: Brazil, Russia, India, and China. These countries together make up 40 percent of the world’s population and just under 30 percent of global GDP. Over the last decade their economies have been among the fastest growing in the world. The EEB invests in 76 equities based in BRIC economies, with a majority weighting towards Brazil. It’s less diversified than the BKF, and more expensive than the BIK.

SPDR S&P BRIC 40 (BIK) +48.98% & .23 vol

China 45% | Brazil 25% | Russia 23% | India 7%

The three BRIC funds are remarkable in that despite their wide discrepancies in geographic distribution, they have performed nearly identically. Their volumes are very similar as well, making the choice between them doubly vexing. The BIK is the cheapest option available, with an expense ratio of just .5% compared to the .6 and .72 percent of its competitors. Although the fund holds only 43 stocks and is almost half devoted to the energy sector, its equal performance and expense ratio puts it on top.

iShares MSCI BRIC Index Fund (BKF) +49.18% & .14 vol

China 35% | Brazil 32% | India 13% | Russia 13% | Hong Kong 7%

iShares’ BRIC offering is the broadest and most expensive of the two. In both geographic and sectoral terms, the BKF is the more diverse choice and should be better poised for the future. But the bare fact that the BKF has performed equal to its peers means its extra expense can’t be justified. At least not yet.


Claymore/BNY Mellon Frontier Markets (FRN) +19.79% & .01 vol

Chile 24% | Poland 20% | Egypt 15% | Columbia 10%| Kazakhstan 6%

The FRN is a true frontier market play. The fact that Kazakhstan is in its top five holdings speaks volumes to the funds objective: to focus on a eclectic array of off the beaten track markets. Its nearly 50% weight to Chile and Poland is concerning, as is it’s small number of holdings and tiny volume. But if you’re looking for a fund to track frontier markets, this is the one.

iShares JPMorgan USD Emerging Markets Bond Fund (EMB) -0.83% & .05 vol

Russia 12% | Brazil 12% | Turkey 9% | Philippines 8%| Malaysia 7% 6.56% yield | BBB-

The EMB is an emerging market bond fund that invests in sovereign dollar denominated debt. Its mix of investment and speculative securities is more weighted towards the investment end than its PCY competitor, and has consequently missed the return of risk appetite in the past few months. Despite this, they both carry a BBB- average rating. It is important to note that because EMB’s debt holdings are dollar denominated, it is an imperfect hedge against a falling dollar.

PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) +16.33% & .12 vol &

Ukraine 7% | Venezuela 5% | Russia 5% | Peru 4%| Indonesia 4% 7.25% yield | BBB-

The PCY invests in a mix of investment grade and speculative emerging market sovereign dollar denominated debt, averaging out to a BBB- rating. Its speculative portfolio is up nicely ytd juicing returns north of 15% and giving the fund a healthy yield. Its 42 holdings average out to a medium term maturity of 7.64 years. Lending money to Ukraine and Venezuela is hardly a low-risk proposition, but PCY offers a good high yield play.

WisdomTree Dreyfus Emerging Currency Fund (CEW) N/A & .07 vol

Chile 24% | Poland 20% | Egypt 15% | Columbia 10%| Kazakhstan 6%

This fund invests in very short term securities (such as CDs and money market accounts) that aim to provide exposure to a broad range of emerging market currencies such as the Yuan, Real, and Rand. It seems to be actively managed to take advantage of the highest interest rates.


PowerShares DWA Emerging Markets Technical Leaders Portfolio (PIE) +23.53% & .02 vol

China 28% | South Korea 16% | Malaysia 10% | Brazil 9% | South Africa 8%

The PIE is a unique fund that uses an index that uses technical analysis to pick winners in the emerging market field. It’s an experiment that hasn’t worked. The PIE is the only fund listed here that has underperformed all its peers both ytd and year on year. The fund is thinly traded.

SPDR S&P Emerging Markets Small Cap (EWX) +47.93 % & .02 vol

Taiwan 28% | China 12% | Brazil 10% | South Africa 10% | India 10%

The EWX has been the better performer of the two emerging market small cap funds, and for good reason. The EWX avoids the South Korea trap, is very heavy on Greater China, and actually includes Brazil in its holdings. With the two expense ratios essentially the same, the EWX is a winner.

WisdomTree Emerging Markets High-Yielding Equity (DEM) +23.17% & .05 vol

Taiwan 30% | South Africa 12% | Malaysia 9% | Brazil 9% | Thailand 7%

DEM is the only emerging market fund that focuses on dividends, and currently carries a juicy yield of around 9%. It’s broadly diversified with a reasonable expense ratio for a specialty product. Its strong Taiwan weighting should help it benefit from the technology boom.

WisdomTree Emerging Markets SmallCap Dividend Fund (DGS) +38.42% & .04 vol

Taiwan 28% | South Africa 16% | Malaysia 10% | Thailand 9% | South Korea 7%

The DGS predictably has a much higher dividend yield than the EWX, but is too severely underexposed to Brazil, India, and China to threaten that fund’s long term potential for capital gains. Because both funds are thinly traded, the choice becomes one of preference for dividends or gains.

ETFGrind Picks:

Broad: VWO or GMM (if you feel comfortable with the liquidity risk)