You may have noticed a consistent theme here at
StreetAuthority in recent months: We love emerging markets.
the strong gains investors are reaping this year
with this asset class
I weighed in on how well emerging market stocks
have done over many decades
Yet here's a curious disconnect: Emerging markets represent
33% of all global trading activity, yet few investors have nearly
that much invested in emerging-market stocks (and bonds). That
figure doesn't likely exceed 5% or 10% for most of you. But these
markets have such great long-term economic growth prospects --
relative to the U.S. and Europe -- that you can't afford to
ignore them anymore.
To be sure, it pays to have a little expertise when navigating
distant markets. Back in April, for example, I recommended
a pair of excellent mutual funds
. Trouble is, they carry expense ratios of 1.50% and 1.51%,
respectively. That's like paying a 1.5% annual tax every year,
just for the privilege of owning them.
Of course, investors can save money by investing through
exchange-traded funds (ETFs), many of which carry expense ratios
in the 0.40% to 0.90% range. But you can do even better than
that. A handful of emerging-market ETFs sport rock-bottom expense
ratios, which means that you get to keep almost every penny that
your fund has earned.
Here's a look at three of them.
1. Vanguard Emerging Markets Stock Index ETF (NYSE:
Expense ratio: 0.15%
Whenever friends ask me about investing in funds, I tell them to
call Vanguard. The firm is known for extremely low expense
ratios, and this fund is no exception.
The fund is a bit heavy on Asia, with a 60% weighting, as
seven of the top eight holdings are in China or Taiwan. China
carries ample near-term risk, due to a shaky financial system,
but should still deliver outsized long-term gains as that economy
eventually grows into the world's largest. Meanwhile, Chinese
stocks have been out of favor in recent quarters, and as a
result, sport relatively lower price-to-earnings (P/E)
2. iShares Core MSCI Emerging Market ETF (Nasdaq:
Expense ratio: 0.18%
While the Vanguard ETF owns nearly 1,000 emerging market
companies, this fund owns a whopping 1,600 firms. Though the
regional concentration of this fund is similar to the Vanguard
fund, it has more exposure to small-cap companies, which are
often the best growth stocks in various markets.
For the slightly higher expense ratio, are investors getting
better performance? This fund has a fairly short track record,
delivering a 15.8% one-year return, according to Morningstar,
compared to a 16% return for the Vanguard fund. Note that this
entire category did quite well in 2009 and 2010, slumped badly in
2011 and has been slowly on the mend since.
3. Schwab Emerging Markets Equity ETF (Nasdaq:
Expense ratio: 0.14%
is a relative latecomer to ETFs, and in a bid to build market
share, slightly undercuts (or at least matches) its rivals in
terms of expense ratios. However, this ETF's portfolio is nearly
identical to the other two.
It would be nice for investors to have access to low-priced
ETFs that bring greater access to Latin America, Africa, the
Middle East and Eastern Europe. But the heavy Asia weighting for
these ETFs reflects that fact that the market value of Asian
emerging-market stocks is much larger. Over time, look for that
gap to narrow -- and for these ETFs to spread their baskets more
broadly around the globe.
Risks to Consider:
Emerging markets tend to be more volatile, so the time-tested
caveat of longer-term time horizons needs to be reiterated.
Action to Take -->
There is no need to own two or three of these ETFs. They all
serve the same purpose. Instead, choose one and also deploy
resources into one of the higher priced mutual funds or
higher-priced thematic ETFs (many of which focus on consumer
spending, dividend growth or other angles). One solid choice: The
EGShares Emerging Markets Consumer ETF (Nasdaq:
which sports a 0.85% expense ratio. That's steep, but the fund
gets five stars from Morningstar and offers much needed exposure
to regions outside of Asia. Latin America, for example, makes up
40% of this ETF's portfolio.