Emerging Market ETF: Where the Growth Is
I’ve been lucky (yeah, I’d prefer to take credit, but honesty is probably the better way to go) to have been holding a decent chunk of my portfolio in emerging markets through Barclays ETF offering (EEM). This part of my portfolio has increased significantly recently. But that’s largely irrelevant to you. What goes up today could easily go down tomorrow.
The attraction of the Barclays ETF is that it makes it easy for individual investors to get in on the growth going on in countries that are too volatile or complicated to otherwise get in to. This ETF complements the international ETF from Barclays which holds shares of non-US, but still well established companies. Unlike the international ETF, iShares EEM does a better job of balancing the weights of individual countries. For example, 16% goes to South Korea, 11% to Taiwan, 10% to China, 10% to Brazil, 10% to Russia, and 9% to South Africa.
Vanguard offers an alternative with their emerging market ETF (VWO). It uses very similar weightings as Barclay’s, but has an annual fee of only 0.30% compared to 0.75%.
There are also ETFs that offer investment opportunities in specific countries of your choice. One risk with such narrowly-focused ETFs is that you’ll chase performance by buying what’s hot just as it peaks. You’ll also want to watch out for specific sector exposure that you wouldn’t normally expect. For example, take something like an ETF that focuses on Russia as an emerging market. It might be heavily weighted with energy investments because of Russia’s well-developed natural gas industry or it could be a very broad fund that exposes the investor to a number of markets scattered throughout this massive country. I prefer the more balanced and less emotional approach of picking up a basket that covers different countries.
With this much diversity, how do you choose the right emerging markets ETF as an individual investor? As is often the case, you must balance risk vs. expected return. For example, determine if your portfolio and tolerance slants towards more risky investments or if, perhaps because of your age, you need to be more focused on limiting losses. The exposure from any given investment can also be managed by what percentage that investment represents of your total portfolio. Many investors automatically say that they would prefer low risk options, which means that a broader ETF is the right choice.