Investors seeking to spice up their investment portfolios should consider adding in an emerging market exchange traded fund into the mix after the area largely underperformed developed countries over the past few years.
“On a reversion-to-the-mean basis, emerging-markets equities appear to be due for better performance than developed-markets equities going forward,” writes Christine Benz, Morningstar‘s director of personal finance.
Any would-be investors should check how much they are comfortable with investing to the emerging markets. Benz points out that the market value of all emerging market stocks makes up less than 10% of the global equities market capitalization, so that is a good place to start. Additionally, investors should be aware that broad international stock funds may also include some emerging market exposure already.
Nevertheless, if one is inclined to add targeted emerging market exposure, there are a number of options available.
For instance, Benz points to the Vanguard Emerging Markets Stock Fund (VEIEX) as a Morningstar favorite. ETF investors, though, can take a look at the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), which is structured as a separate share class of Vanguard’s Emerging Markets Fund. The iShares MSCI Emerging Markets ETF (NYSEArca: EEM) is another popular option. However, unlike VWO, EEM, which tracks an MSCI Index, considers South Korea an emerging market.
Moreover, investors can take a look at a new breed of low-volatility index-based ETFs that try to exploit the so-called low-volatility anomaly – research has indicated that low-volatility stocks tend to outperform portfolios with higher volatility over the long term. For example, ETF investors can use the iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEArca: EEMV) and PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSEArca: EELV). EEMV holds heavy tilts toward emerging Asia, notably China and Taiwan. EELV, on the other hand, has a smaller position in China, but overweights Taiwan and Malaysia. [A Favored Approach to Emerging Markets ETFs]
Additionally, for the income-focused investor, EGShares EM Quality Dividend ETF (NYSEArca: HILO) provides a play on dividend-paying companies from developing markets. HILO recently changed its index from a low-volatility dividend index to the EGAI Emerging Markets Quality Dividend Index.
Potential emerging market ETF investors should be aware that since many of these related indices are market-cap-weighted, China makes up a hefty position in many emerging market indices. Additionally, the China weight could rise even further if benchmark index providers begin adding onshore Chinese A-shares in.
For more information on the developing economies, visit our emerging markets category.
Max Chen contributed to this article.
CORRECTION: HILO underlying index and target strategy.