ETFs in an Emerging Market: 10 Best ETFs To Buy
In this article, we discuss 10 best emerging market ETFs to buy. If you want to skip our discussion on emerging market economic outlook, head over ETFs in an Emerging Market: 5 Best ETFs To Buy.
Global interest rates have experienced volatility, particularly on longer-term government bonds, with 10-year US Treasury yields climbing again after a brief retreat. However, emerging market economies have witnessed milder rate movements. Despite historical expectations of substantial spillovers from advanced economies' interest rates to emerging markets, major emerging markets, especially in Asia, have shown increased resilience to global interest rate volatility. This resilience is underscored by stable exchange rates, stock prices, and sovereign spreads, as well as continued investor interest in emerging market bond markets despite heightened volatility. Many emerging markets have strengthened their policy frameworks over the years, accumulating currency reserves, refining exchange-rate arrangements, and improving central bank independence and credibility. During the post-pandemic era, emerging market central banks have raised interest rates earlier and by wider margins compared to advanced economies, creating buffers against external pressures. Additionally, the rise in commodity prices during the pandemic has supported the external positions of commodity-producing emerging markets.
GlobalxETFs suggests that investors reassess their underweight positions in emerging markets (EM), as the asset class shows potential for outperformance in 2024. Despite representing a significant portion of global land, population, and GDP growth, EM countries account for only a small fraction of global market cap. Currently, EM equities are trading at historically low valuations compared to the United States, indicating a margin of safety and potential for growth, especially with the prospect of a weaker US dollar. Brazil is seen as a promising cyclical opportunity for 2024, with the Central Bank cutting interest rates significantly, historically leading to rallies in the MSCI Brazil Index. India is viewed as offering strong structural growth potential, supported by its large, educated population and market-friendly government. China is considered to have reached a point of "peak pessimism," with consumer names appearing attractive from a valuation and earnings perspective. Greece, having received an investment-grade upgrade, is seen as poised for performance in 2024 due to its attractive valuation and political and economic momentum.
Moreover, the US dollar is identified as a key driver of broad EM equity performance, with EM equities historically displaying an inverse relationship with the dollar. Expectations for EM EBITDA growth are optimistic, driven by factors such as China's reopening, India's momentum, and monetary easing across Latin America. With interest rates potentially stabilizing, investors may turn to EM for growth opportunities, particularly in a weaker dollar environment. EM has historically performed well following the last hike of a rate cycle.
Franklin Templeton expresses optimism regarding equity markets in 2024, citing factors such as the expectation of a recovery in earnings growth, a probable soft economic landing in the US, and signs indicating that interest rates have peaked. They highlight the historical trend of emerging market equities rising following the first Federal Reserve rate cut. With over four billion people participating in elections throughout the year, including key countries like India, Indonesia, and Mexico, political stability is anticipated to support market sentiment. In India, the incumbent Bharatiya Janata Party (BJP) is expected to retain power, benefiting from ongoing reforms. Consensus forecasts anticipate a rebound in global earnings growth, particularly in emerging markets such as South Korea and Taiwan, which are projected to drive earnings growth in the region by 18% in 2024. Despite this, emerging market equities' price-to-earnings (PE) ratios remain below their long-term averages, potentially offering investment opportunities. While China's economic outlook remains challenging, signs of stabilization are welcomed, and select Chinese companies are seen as oversold, presenting potential investment opportunities.
Exchange traded funds act as convenient investment vehicles for investors to explore and benefit from emerging markets. Some of the top emerging markets stocks investors are exposed to include Vale S.A. (NYSE:VALE), PDD Holdings Inc. (NASDAQ:PDD), and Infosys Limited (NYSE:INFY).
Our Methodology
We used an ETF screener and shortlisted around 30 emerging markets ETFs which had a trading volume of over 100,000. Then, we selected the 10 best emerging markets ETFs based on 5-year share price returns as of March 12, 2024, ranking the list in ascending order of the returns. We have also discussed the top holdings of the ETFs to offer better insight to potential investors.
A close-up of a portfolio of stocks, emphasizing the broad equity portfolio of the company.
ETFs in an Emerging Market: Best ETFs To Buy
10. Schwab Emerging Markets Equity ETF (NYSE:SCHE)
5-Year Share Price Returns as of March 12, 2024: 14.06%
Schwab Emerging Markets Equity ETF (NYSE:SCHE) aims to closely follow the total return of the FTSE Emerging Index, providing easy access to large- and mid-cap equities in over 20 emerging market countries. Launched on January 14, 2010, Schwab Emerging Markets Equity ETF (NYSE:SCHE) holds $8.5 billion in net assets, with an expense ratio of 0.110%. Its portfolio includes 1,938 stocks as of March 11, 2024.
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is the largest holding of Schwab Emerging Markets Equity ETF (NYSE:SCHE). On March 6, J.P. Morgan increased its price target for Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) shares from NT$770 to NT$850, citing expectations of significant AI-related revenue.
According to Insider Monkey’s fourth quarter database, 105 hedge funds were long Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM), compared to 107 funds in the last quarter.
In addition to Vale S.A. (NYSE:VALE), PDD Holdings Inc. (NASDAQ:PDD), and Infosys Limited (NYSE:INFY), Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is one of the best emerging markets stocks to consider.
Baron Emerging Markets Fund stated the following regarding Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) in its fourth quarter 2023 investor letter:
“Semiconductor giant Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) contributed in the fourth quarter due to investor expectations for a cyclical recovery in semiconductors heading into 2024 and significant incremental demand for artificial intelligence (AI) chips. We retain conviction that Taiwan Semi’s technological leadership, pricing power, and exposure to secular growth markets, including high-performance computing, automotive, 5G, and IoT, will allow the company to sustain strong double-digit earnings growth over the next several years.”
9. iShares Core MSCI Emerging Markets ETF (NYSE:IEMG)
5-Year Share Price Returns as of March 12, 2024: 15.66%
iShares Core MSCI Emerging Markets ETF (NYSE:IEMG) ranks 9th on our list of the best emerging market ETFs. iShares Core MSCI Emerging Markets ETF (NYSE:IEMG) aims to replicate the performance of the MSCI Emerging Markets IMI Net Index, comprising large, mid, and small-cap equities in emerging markets. Established on October 18, 2012, the fund holds $76 billion in net assets, with a net expense ratio of 0.09%. Its portfolio consists of 2,943 stocks as of March 11, 2024.
Tencent Holdings Limited (OTC:TCEHY) is one of the top holdings of iShares Core MSCI Emerging Markets ETF (NYSE:IEMG). Tencent Holdings Limited (OTC:TCEHY), a Chinese investment holding company, operates in multiple segments including value-added services, online advertising, fintech, and business services.
8. Vanguard Emerging Markets Stock Index Fund (NYSE:VWO)
5-Year Share Price Returns as of March 12, 2024: 16.80%
Vanguard Emerging Markets Stock Index Fund (NYSE:VWO) is one of the best emerging market ETFs to buy. Vanguard Emerging Markets Stock Index Fund (NYSE:VWO) invests in stocks of companies located in global emerging markets, including China, Brazil, Taiwan, and South Africa. Its objective is to closely mirror the performance of the FTSE Emerging Markets All Cap China A Inclusion Index. As of February 27, 2024, Vanguard Emerging Markets Stock Index Fund (NYSE:VWO) has an expense ratio of 0.08%. The fund's portfolio comprises 5,781 stocks, and as of January 31, 2024, it holds net assets totaling $97.9 billion.
Alibaba Group Holding Limited (NYSE:BABA) is one of the biggest holdings of Vanguard Emerging Markets Stock Index Fund (NYSE:VWO). On February 29, Alibaba Group Holding Limited (NYSE:BABA) announced that it plans to implement a significant price reduction for its cloud services, marking the second such reduction in recent years. The move is aimed at regaining users from competitors like Tencent, particularly in the field of providing tools for AI training. The discounted services extend to over 100 products, including data storage and elastic computing options for online processing power.
According to Insider Monkey’s fourth quarter database, Alibaba Group Holding Limited (NYSE:BABA) was part of 116 hedge fund portfolios, compared to 110 in the last quarter.
Baron Emerging Markets Fund stated the following regarding Alibaba Group Holding Limited (NYSE:BABA) in its fourth quarter 2023 investor letter:
“Alibaba Group Holding Limited (NYSE:BABA) is the largest retailer and e-commerce company in China. Alibaba operates shopping platforms Taobao and Tmall and owns 33% of Ant Group, which operates Alipay, China’s largest third-party online payment provider. Shares of Alibaba were down in the fourth quarter due largely to the delay of the previously announced spin-off of its cloud division. Quarterly results were roughly in line with Street expectations, with strength in profitability. We retain conviction that Alibaba is well positioned to benefit from the ongoing growth in online commerce and cloud development in China. While the company is seeing early progress in its efforts to re-invigorate customer engagement and retention as well as merchant investment initiatives, we believe this investment will likely take some time to flow through to accelerating earnings growth. As such, we remain investors but have reduced our position as we monitor further progress.”
7. SPDR Portfolio Emerging Markets ETF (NYSE:SPEM)
5-Year Share Price Returns as of March 12, 2024: 18.39%
SPDR Portfolio Emerging Markets ETF (NYSE:SPEM) aims to match the performance of the S&P Emerging BMI Index, offering low-cost access to a diverse range of emerging market equities. SPDR Portfolio Emerging Markets ETF (NYSE:SPEM) may help reduce country-specific risks. As of March 11, 2024, the ETF has assets under management totaling $8,571.42 million, with an expense ratio of 0.07% and a portfolio comprising 3,460 stocks. SPDR Portfolio Emerging Markets ETF (NYSE:SPEM) is one of the best emerging market ETFs to invest in.
HDFC Bank Limited (NYSE:HDB) is one of the top holdings of SPDR Portfolio Emerging Markets ETF (NYSE:SPEM). HDFC Bank Limited (NYSE:HDB) is a financial institution based in Mumbai, India, offering banking services across India, Bahrain, Hong Kong, and Dubai. Its operations are divided into Wholesale Banking, Retail Banking, and Treasury Services segments. On January 16, HDFC Bank Limited (NYSE:HDB) reported a Q3 revenue of ₹717.7 billion, up 113.5% on a year-over-year basis.
According to Insider Monkey’s fourth quarter database, 41 hedge funds were bullish on HDFC Bank Limited (NYSE:HDB), compared to 38 funds in the last quarter. Andreas Halvorsen’s Viking Global is the largest stakeholder of the company, with 9.7 million shares worth $653.70 million.
6. Schwab Fundamental Emerging Markets Large Company Index ETF (NYSE:FNDE)
5-Year Share Price Returns as of March 12, 2024: 22.23%
Schwab Fundamental Emerging Markets Large Company Index ETF (NYSE:FNDE) aims to mirror the performance of the Russell RAFI Emerging Markets Large Company Index, excluding fees and expenses. Launched on August 15, 2013, Schwab Fundamental Emerging Markets Large Company Index ETF (NYSE:FNDE) holds $5.52 billion in net assets, with a net expense ratio of 0.390%. Its portfolio comprises 391 stocks as of March 11, 2024. Schwab Fundamental Emerging Markets Large Company Index ETF (NYSE:FNDE) ranks 6th on our list of the best emerging market ETFs.
Petróleo Brasileiro S.A. - Petrobras (NYSE:PBR) is one of the top holdings of Schwab Fundamental Emerging Markets Large Company Index ETF (NYSE:FNDE). Petróleo Brasileiro S.A. - Petrobras (NYSE:PBR) is a Brazilian oil and gas company involved in exploration, production, refining, transportation, marketing, and distribution of oil and gas products domestically and internationally. Petrobras CEO Jean Paul Prates announced plans on February 20 to invest approximately $1.5 billion, alongside partners, in deploying a decarbonization technology at one of their oilfields. Success in this pilot project could lead to broader application of the technology across other oilfields, ultimately reducing Petrobras' carbon emissions.
According to Insider Monkey’s fourth quarter database, 36 hedge funds were bullish on Petróleo Brasileiro S.A. - Petrobras (NYSE:PBR), same as the prior quarter. Rajiv Jain’s GQG Partners is the leading stakeholder of the company, with 213.16 million shares worth $3.4 billion.
Like Vale S.A. (NYSE:VALE), PDD Holdings Inc. (NASDAQ:PDD), and Infosys Limited (NYSE:INFY), Petróleo Brasileiro S.A. - Petrobras (NYSE:PBR) is one of the best emerging markets stocks to consider.
Fairlight Capital made the following comment about Petróleo Brasileiro S.A. – Petrobras (NYSE:PBR) in its Q3 2023 investor letter:
“Throughout the year, we have reviewed thousands of companies, including many in the oil sector. While we are generally cautious about commodity-based businesses where the company lacks control over the price of what it produces, the valuations in several cases have reached extremely compelling levels. For example, Petróleo Brasileiro S.A. – Petrobras (NYSE:PBR) and Ecopetrol (EC). Petrobras has distributed dividends of over $2.30 paid this year3 , while Ecopetrol has traded as cheaply as the $9-$10 range (close to our purchase price) and is paying approximately $2.50 in dividends this year.
We factor in the potential cost of FX movements over time, but even under the most pessimistic scenarios the investments should work out well. We initially came across these ideas while looking at South American stocks in general. We saw that many market commentators had expressed concerns that Ecopetrol’s dividends might be halted, especially following the election of Gustavo Petro as president of Colombia in June 2022. Similarly, there have been reservations about the sustainability of Petrobras’s dividend. However, the government owns substantial controlling stakes in these companies and is also a recipient of their dividends. For Ecopetrol, the Colombian government owes money to Ecopetrol due to the Fuel Price Stabilization Fund (FEPC). This fund aims to stabilize fuel prices for Colombian consumers. It bridges the gap between international and national Colombian consumer prices by compensating producers and importers for this price difference. The primary goal is to cushion the impact of global oil price fluctuations on the Colombian market. This is achieved either through cash payment or by forgoing dividend payments due from the government’s stake in these companies. In Ecopetrol’s case, the dividends paid (or those that would be paid to the government) are applied against the outstanding balances…” (Click here to read the full text)
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Disclosure: None. ETFs in an Emerging Market: 10 Best ETFs To Buy is originally published on Insider Monkey.
