Emerging-markets stock ETFs offer exposure to higher-growth markets, but they also can be volatile. Here is a look at the pros and cons of these investments.
5 min
For some investors seeking to diversify their portfolios, emerging markets are looking increasingly attractive.
There are 169 emerging-markets stock ETFs available to fund investors, with total assets of about $296 billion, according to fund researcher Morningstar Direct.
Some analysts and financial advisers say there is a lot to like about this sector right now. What is the argument for putting money into these exchange-traded funds? And what’s the argument for getting out, or not starting at all? Here’s a look at the pros and cons.
One factor driving interest in emerging-markets ETFs is that emerging economies are growing faster than advanced economies, and that isn’t forecast to change soon. The International Monetary Fund forecasts real GDP growth of only 1.4% in advanced economies in 2024 due to inflation, monetary policy and other factors. In contrast, the IMF projects real GDP growth of 4.1% for emerging and developing economies, helped by countries such as India, which is expected to grow at a rate of 6.3%.
“The biggest reason to invest in emerging-markets ETFs today is to gain exposure to high-growth markets with burgeoning middle-class consumers such as China, India, Mexico, Taiwan, South Korea and Vietnam,” says Aniket Ullal, senior vice president and head of ETF data and analytics at CFRA Research. He says emerging markets are home to more than 4.3 billion people, and they account for about half of global GDP.
Another attraction is that valuations on emerging-markets stocks are low. While the price-to-earnings ratio of the S&P 500 was 22.4 based on trailing 12-month reported earnings as of July 31, the P/E ratio of the MSCI Emerging Markets—which includes the stock of most liquid large- and midcap companies in 25 emerging-market countries—was 14.13.
“This is a smart contrarian play for investors who want to diversify their portfolios geographically,” says Gabriel Shahin, president of Falcon Wealth Planning, an investment adviser in Los Angeles. “There is a fire sale going on in emerging-market stocks, and this is one of the smartest plays in equity investing right now.”
Some see these investments as a hedge, considering this year’s U.S. stock rally—dominated by a small number of large-cap technology companies—could end at any time.
Emerging-markets ETFs come in many varieties, so investors can choose those that align with their macroeconomic outlook and financial goals.
While some of these funds invest in a broad basket of emerging-market countries that span the globe such as the $72.1 billion iShares Core MSCI Emerging Markets ETF (IEMG), others invest in geographic regions such as Asia or Latin America or are country-specific.
The $64.2 million Franklin FTSE Latin America ETF (FLLA), for example, invests in large-cap and midcap companies in Brazil, Chile, Colombia and Mexico. It has returned more than 19% year-to-date through Aug. 29 and 15.6% over the past year. The $175.8 million Franklin FTSE Taiwan ETF (FLTW) invests in midcap and large-cap Taiwanese companies. It has a year-to-date return of 14.7% and a one-year-return of 8.2% as of Aug. 29.
For investors concerned about the economic slowdown in China, there are emerging-markets ETFs that exclude Chinese equities such as the $5.16 billion iShares MSCI Emerging Markets ex-China (EMXC). Its top holdings are Taiwan Semiconductor Manufacturing, Samsung Electronics and Reliance Industries.
Some emerging-markets ETFs target small- or large-cap stocks. One is the $34.2 million VanEck Brazil Small-Cap ETF (BRF), which is up about 32% year-to-date and 11.4% over one year as of Aug. 29. Others focus on industry sectors such as technology and e-commerce.
While most emerging-markets equity ETFs track indexes, an increasing number of newer funds are actively managed. Of the 11 emerging-markets ETFs that have launched this year, eight are actively managed, including Global X Brazil Active ETF (BRAZ), a $2.61 million fund that invests in Brazilian companies such as Petrobras, a multinational petroleum company, and Vale, the world’s largest iron-ore producer.
There are even emerging-markets ETFs that pay dividends, such as the $243.5 million SPDR S&P Emerging Market Dividend ETF (EDIV), which is up 28.2% year-to-date through Aug. 29 and has a dividend yield of 3.78%.
According to Morningstar Direct, the top-performing emerging market ETFs this year through Aug. 29 are VanEck Brazil Small-Cap, SPDR S&P Emerging Market Dividend and iShares MSCI Brazil Small-Cap (EWZS), which is up 24.1% so far this year and 5.7% over one year.
Some advisers, however, say investors looking at emerging-markets equity funds should proceed with caution.
“Emerging-markets equity ETFs are more volatile than international ETFs that focus on stocks in advanced economies,” says Lan Anh Tran, a research analyst at Morningstar Direct. Over the past 10 years ended July 31, 2023, the standard deviation of the MSCI Emerging Market Index was 16.2% higher than the MSCI World Index—a proxy for global developed-market stocks, she notes. Standard deviation measures volatility, with a higher number representing more volatility.
That’s because any sudden geopolitical event (such as the war in Ukraine) or any economic shock (like soaring inflation or a global supply-chain disruption) can have a jarring effect on emerging-market economies that are dependent on commodity exports, tourism and the health of advanced economies, investment strategists say.
There also is the risk of government influence and regulation on emerging-markets stocks, says Tran. A government, for example, can decide to nationalise an industry at any time, or exercise control over an industry sector.
Currency movements are another risk factor to consider, says CFRA’s Ullal. “If the dollar strengthens against local currencies, your fund returns will erode,” he says.
“It’s important that investors understand this is a high-risk, high-reward investment before they dive into them,” says Andrew J. Feldman, the founder of A.J. Feldman Financial in Chicago. “These funds can be highly volatile due to a host of systemic risks in emerging-market countries, including economic risk, geopolitical risk, currency risk and liquidity risk.”
These challenges make some investors skittish about investing in emerging-markets ETFs, says Kevin Shuller, founder and chief investment officer of Cedar Peak Wealth Advisors in Denver. “They believe that companies domiciled in the U.S. do a lot of business in emerging markets, so if you own the S&P 500 or MSCI EAFE index you have all the exposure you need.”
“It’s a good counterargument,” he says, “but [it] doesn’t take into account that the party in the U.S. stock market may not go on forever.”
Many investment advisers instead suggest individual investors take a step-by-step approach when choosing an emerging-markets ETF and allocate 5% to 10% of their equity portfolio in such vehicles.
“Country selection matters most so check the fund’s geographic exposure,” says Perth Tolle, founder of Life + Liberty Indexes and the $625.4 million Freedom 100 Emerging Markets ETF (FRDM), which invests in about 100 companies in 10 countries that aren’t autocracies but freer markets such as Chile, Poland, South Korea and Taiwan.
Also look at the methodologies and metrics the ETF uses when choosing stocks for its index or portfolio, as well as the fund fees. The average expense ratio for this ETF group is 0.51%, according to Morningstar Direct.
“A good way to assess a fund’s value is to look at its weighted average price to cash flow,” a measure of the price of a company’s stock relative to how much cash flow it generates, says Kevin Grogan, chief investment officer at Buckingham Wealth Partners in St. Louis. It gives a pulse reading on how cheap or expensive the emerging-markets stocks are in the fund.
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The U.S. now has more billionaires than China for the first time in a decade, driven by AI and a booming stock market.
3 min
The number of U.S. billionaires in the world reached 870 in mid-January, outpacing the number in China for the first time in 10 years, according to a snapshot of the wealthiest in the world by the Hurun Report.
The U.S. gained 70 billionaires since last year, powered by a rising stock market, a strong dollar, and the insatiable appetite for all things AI, according to the 14th annual Hurun Global Rich List . China gained nine billionaires overall for a total of 823. Hurun is a China-based research, media, and investment group.
“It’s been a good year for AI, money managers, entertainment, and crypto,” Rupert Hoogewerf, chairman and chief researcher of the Hurun Report, said in a news release. “It’s been a tough year for luxury, telecommunications, and real estate in China.”
Overall, the Hurun list—which reflects a snapshot of global wealth based on calculations made Jan. 15—counted 3,442 billionaires in the world, up 5%, or 163, from a year ago. Their total wealth rose 13% to just under $17 trillion.
In November, New York research firm Altrata reported that the billionaire population rose 4% in 2023 to 3,323 individuals and their wealth rose 9% to $12.1 trillion.
Elon Musk, CEO of electric-car maker Tesla and right-hand advisor to President Donald Trump, topped the list for the fourth time in five years, with recorded wealth of $420 billion as of mid-January as Tesla stock soared in the aftermath of the U.S. election, according to Hurun’s calculations.
The firm noted that Musk’s wealth has since nosedived about $100 billion, falling along with shares of Tesla although the EV car maker is benefiting on Thursday from Trump’s 25% tariff on cars made outside the U.S.
According to the Bloomberg Billionaires Index, Musk’s wealth stood at about $336 billion as of the market’s close on Wednesday, although measuring his exact wealth —including stakes in his privately held companies and the undiscounted value of his Tesla shares—is difficult to precisely determine.
The overall list this year contained 387 new billionaires, while 177 dropped off the list—more than 80 of which were from China, Hurun said. “China’s economy is continuing to restructure, with the drop-offs coming from a weeding out of healthcare and new energy and traditional manufacturing, as well as real estate,” Hoogewerf said in the release.
Among those who wealth sank was Colin Huang, the founder of PDD Holdings —the parent company of e-commerce platforms Temu and Pinduoduo—who lost $17 billion.
Also, Zhong Shanshan, the founder and chair of the Nongfu Spring beverage company and the majority owner of Beijing Wantai Biological Pharmacy Enterprise , lost $8 billion from “intensifying competition” in the market for bottled water. The loss knocked Zhong from his top rank in China, which is now held by Zhang Yiming founder of Tik-Tok owner Bytedance. Zhang is ranked No. 22 overall.
Hurun’s top 10 billionaires is a familiar group of largely U.S. individuals including Jeff Bezos, Mark Zuckerberg, and Larry Ellison. The list has France’s LVMH CEO Bernard Arnault in seventh place, three notches down from his fourth ranked spot on the Bloomberg list, reflecting a slump in luxury products last year.
Nvidia CEO Jensen Huang is ranked No. 11 on Hurun’s list as his wealth nearly tripled to $128 billion through Jan. 15. Other AI billionaires found lower down on the list include Liang Wenfeng, 40, founder and CEO of DeepSeek, with wealth of $4.5 billion and Sam Altman, CEO of OpenAI, with $1.8 billion.
Also making the list were musicians Jay-Z ($2.7 billion), Rihanna ($1.7 billion), Taylor Swift ($1.6 billion), and Paul McCartney ($1 billion). Sports stars included Michael Jordan ($3.3 billion), Tiger Woods ($1.7 billion), Floyd Mayweather ($1.3 billion), and LeBron James ($1.3 billion).
Wealth continues to surge across the globe, but Hoogewerf noted those amassing it aren’t overly generous.
“We only managed to find three individuals in the past year who donated more than $1 billion,” he said. Warren Buffet gave $5.3 billion, mainly to the Bill and Melinda Gates Foundation, while Michael Bloomberg —ranked No. 19 with wealth of $92 billion—gave $3.7 billion to various causes. Netflix founder Reed Hastings, ranked No. 474 with wealth of $6.2 billion, donated $1.1 billion.
