How to invest in emerging markets with an ETF
Investing in emerging markets can be very attractive. Emerging markets can still grow significantly and as an investor, you can benefit from this. In addition, by investing in emerging markets, you can diversify your portfolio.
What is an emerging markets ETF?
An emerging markets ETF is an investment product that allows you to invest in the price developments of emerging markets. For example, an emerging markets ETF invests in stocks from China, Brazil, and Russia. It is important to research in which markets the ETF invests: this can vary significantly.
Do you want to read in more detail how ETFs work? Then read our comprehensive ETF explanation and start well-informed:
How to invest directly in emerging markets?
You can invest in emerging markets with an online broker. In the table, you see an overview of the best brokers with which you can invest in emerging markets:
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What are good emerging markets ETF’s?
Before you can invest in emerging markets using an ETF, you must first select a fund. In this part of the article, I will discuss some attractive emerging market ETFs.
Xtrackers MSCI Emerging Markets ESG UCITS ETF 1C
This is a great ETF if you want to invest in large companies located in emerging markets at low costs. This ETF charges 0.25% in ongoing costs.
The fund tracks the MSCI index, in which China is a heavyweight. In addition to China, the MSCI Emerging Markets also invests in Taiwan, South Korea, India, Ireland, and to a lesser extent in South Africa, Brazil, and Russia.
This index also only follows companies that meet certain social standards, so there is no blood on your hands with this investment. You can find this ETF under ISIN IE00BG370F43.
Vanguard FTSE Emerging Markets
A great alternative to the MSCI Emerging Markets fund is the Vanguard FTSE Emerging Markets, which can be found under ISIN IE00B3VVMM84. This fund invests in more stocks than the MSCI Emerging Markets and also has slightly lower transaction costs: 0.22% annually.
The fund invests mainly in Asia but also has positions in the Middle East, Latin America, and Emerging Europe.
You can also choose to invest in a specific region with an ETF. For example, with the iShares MSCI Brazil, you can invest in large and medium-sized companies in this large country.
One disadvantage of the iShares MSCI Brazil is its higher ongoing costs, which amount to 0.74%.
Be sure to do thorough research before investing in an ETF that focuses specifically on one region. Your investments will be less diversified, which makes your region-specific risk higher.
In an article about emerging markets, the giant China cannot be left out. An example of a good fund that allows you to invest in both mainland China and Hong Kong is the iShares MSCI China, which can be found under IE00BQT3WG13. The ongoing costs are only 0.4%, which makes it an attractive option.
Do you want to learn more about investing in China? Read our extensive special about this region!
How can you buy an emerging market ETF?
Emerging market ETFs are traded on the stock exchange, just like stocks. This means you can buy or sell the securities at any time. However, you need to have an account with a reliable broker first. Use the button below to open an account with eToro and take advantage of free transaction costs for funds included in the core selection:
After opening an account and depositing funds, you can simply find the ETF by using the search bar. Then, press the buy button to place an order. Here, you enter how many shares of the ETF you want to buy and what type of order you would like to use. With a market order, you buy the ETF at the current price, and with a limit order, you set the price you are willing to pay.
Why can it be interesting to invest in emerging markets?
One argument for investing in emerging markets is the rapidly growing middle class. Prosperity is increasing worldwide, so more people have money to spend. This allows companies to sell their products to the domestic market, which is good for profitability.
Investing in emerging markets can also add extra diversification to your portfolio. For example, if things go bad in America, they don’t necessarily have to go bad in China. By investing in many regions, you reduce the volatility of your investments.
You can also achieve a nice return on investments in emerging markets. The American and European markets have already become “mature,” making significant growth difficult to achieve. This space is often available in emerging markets: for example, China’s GDP has grown by more than 7% on an annual basis year after year.
What are the risks of emerging market ETFs?
Despite these benefits, there are also risks associated with investing in emerging markets. Emerging markets are often less stable, so political problems can ruin the results of your investments.
There is also a currency risk: the currencies used in emerging regions are less stable, which can greatly affect your returns.
There is often a lack of transparency, making it difficult to determine how companies in emerging markets are actually performing. Quality standards for company publications are often lower, and there is also often corruption.
Is it wise to invest in emerging market ETFs?
Personally, I think it is certainly interesting to invest in emerging market ETFs. The IMF has already indicated that there will be stronger growth in emerging markets in the coming years compared to developed countries.
However, some risk-taking is necessary, as emerging markets are less stable, and returns are not guaranteed. Spread your chances across different regions to improve your returns and don’t invest all your money in emerging markets.
Frequently asked questions about emerging market ETFs
An emerging market is a market characterized by rapid growth. It is likely that they will eventually become fully developed markets. The largest emerging markets at the moment are China and India, followed by Brazil, Russia, Indonesia, Mexico, Saudi Arabia, and Turkey.
Do not be blinded by the name of the ETF: some ETFs are not as diversified as you might expect. Therefore, delve deep into the matter and research where the fund invests. That way, you can be sure that you are really investing in emerging markets and not just a handful of stocks from China. Invest in large funds with relatively low costs and a good level of diversification.
An ETF often has relatively low costs due to its passive nature: you rarely pay more than 0.5% in ongoing costs. These costs are necessary to cover the fixed costs of the fund: the administrative costs and transaction costs within the fund. You also often pay one-time transaction costs to your broker when buying and selling a fund.
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