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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Strong family financial planning can help reduce taxes and support younger generations. From intrafamily loans and asset gifts to inheritance disclaimers, strategic cooperation can create meaningful financial benefits—when families have the trust and structure to make it work.
4 min
Happy is the family whose members—parents, grandparents and grown children—trust each other enough to cooperate on shared goals, especially financial ones. When that is truly the case, Uncle Sam’s tax rules can help as well.
This matters especially now that mortgage rates are above 7%, and many families are looking for ways to help younger members. If the elders have resources and are confident younger ones can cooperate, a family loan could make homeownership possible while providing the elders with a useful income stream.
Other strategies can actually lower taxes, such as when funding 529 plans or Roth IRAs, or when someone inherits a traditional IRA with required withdrawals larger than they will need.
Here are three strategies useful for functional families.
It is perfectly legal for families to lend money to a relative for a down payment or even a private mortgage.
But it is important not to cut corners, says Ryan McKeown, a CPA with Modern Wealth Enhancement in Minnesota. If the loan is for a down payment, be honest with the mortgage provider and have a formal agreement. The lender owes tax on the interest payments received.
If the loan is for a private mortgage, both sides should have legal representation with a formal written agreement, including payment terms. The lender owes tax on the interest, and the borrower often can deduct it if he or she itemizes.
To avoid IRS trouble, the interest rate shouldn’t be lower than the agency’s Applicable Federal Rate at the time of the loan. Currently that is about 5% for loans longer than nine years; about 4.5% for loans three to nine years; and about 4% for loans three years or less. Currently, traditional mortgage rates are generally above 7%.
In addition, the lender could use the $19,000 annual gift-tax exemption (described below) to forgive some or all of the interest or principal annually. If both lenders and borrowers are married, that is up to $76,000 a year. There is no tax for the borrower on such forgiveness, because it is from a gift.
If you’re going this route, McKeown advises against having a fixed plan to forgive the debt. Instead, do it in one-off letters specifying the amount—and keep careful records. Otherwise the IRS might try to treat the loan as a taxable gift.
Powerful tax-saving moves for families often use gift-tax provisions. Under current law, anyone can give anyone else up to $19,000 of assets annually, free of gift tax. That means a married couple with three grandchildren could give them a total of $114,000 in 2026.
The gifts can be cash or other assets, like stock. For noncash gifts, the cost basis—which is the starting point for measuring taxable gain after a sale—“carries over” to the recipient. So if someone buys $1,000 of stock and gives it away when it is worth $5,000, the recipient’s cost basis is $1,000. If the recipient later sells the shares for $8,000, the taxable gain is $7,000.
Here’s an example showing how gifts could save a family taxes. Grandma is a widow of modest means, while her child and spouse have prospered. The couple has two children, and they want to contribute $5,000 to a 529 college-savings plan for each—but they need to sell stock to do it. Their tax rate on the sale would be 18.8%, and they would need to sell about $11,000 of stock.
However, Grandma’s federal tax rate on the stock sale is 0%. If the couple gives $10,000 of shares to Grandma, she could sell them, pay no tax, and fund the grandchildren’s 529 plans. This saves about $1,000 of tax.
These moves are legal, and they could be used in other ways, such as to help a young person fund a Roth IRA.
But trust among family members is essential: Under the law, givers can’t put conditions on a gift. Grandma could use her stock proceeds to take a cruise, but she makes 529 contributions instead.
Mark Sellner, a retired tax attorney and CPA living in Sarasota, Fla., uses this strategy. His children sell stock he gives them and fund 529 plans for his grandchildren.
The family’s tax savings aren’t huge, but he likes other benefits. The sales by his children don’t boost his adjusted gross income, which in turn could raise his Medicare Irmaa premiums or his 3.8% surtax on net investment income.
Sellner doesn’t worry about his children using the funds for another purpose.
“There can’t be any strings attached to gifts. Of course, it is up to us to decide whether to make them in the future,” he says.
Two caveats: The “kiddie tax” applies to most children under age 24, and it is levied at the parents’ rate on investment income above $2,700 in 2026. Consider this before making gifts to a young person.
Investors who give away stock also forgo the step-up, an important provision that exempts assets held at death from capital-gains tax.
Sellner knows he’s losing a step-up, but says, “The children could use a little more now. Why should they wait 20 years to get it?”
A disclaimer is a highly useful strategy in which one heir renounces an inheritance in favor of another heir. Assuming family members cooperate, this can save taxes.
Here’s one example. Dad died and had a large traditional IRA that he left to Mom. She has enough assets and income to cover her expenses, and she lives in a state with a stiff estate tax. The inherited IRA would put her estate over the threshold.
Also surviving are three young-adult children. If Mom disclaims all or part of Dad’s IRA within nine months of his death, that amount could go directly to the children. They will have 10 years to empty the account, and the family as a whole will likely save estate and income taxes.
Disclaimers have many key details, especially regarding beneficiary documents. Although heirs have great freedom in choosing what assets to disclaim, the rules about who gets disclaimed property are rigid. It is best if the original owner names tiers of heirs so that if one disclaims, the next recipient is clear.
