Emerging markets have been a somewhat unloved sector over the last decade, but the world is changing and this could benefit these regions. Overall, emerging economies account for 50% of global GDP and 66% of global GDP growth in the last 10 years. One of the best ways to capitalise on possible future growth in these areas is by investing in an emerging market exchange-traded fund (ETF).
No one can predict the future, so it’s impossible to say what will be the best emerging markets ETF in the coming years. However, we can gain some useful insights from the past, and below are the best-performing emerging markets ETFs from recent years.
| Icon | Fund | 5-year performance | YTD performance (to 3 July 2024) | Link to invest |
|---|---|---|---|---|
 | SPDR MSCI Emerging Markets Small Cap UCITS ETF (EMSM) | 57.82% | 8.27% | Invest with HLCapital at risk |
 | iShares MSCI Emerging Markets Small Cap UCITS ETF (IEMS) | 54.28% | 6.98% | Invest with HLCapital at risk |
 | WisdomTree Emerging Markets SmallCap Dividend UCITS ETF (DGSE) | 38.80% | 6.11% | Invest with InvestEngineCapital at risk |
 | Xtrackers MSCI Emerging Markets ESG Screened UCITS ETF 1C (XDEX) | 38.48% | 7.03% | Invest with iiCapital at risk |
| iShares Edge MSCI EM Value Factor UCITS ETF USD(Acc) (EMVL) | 36.66% | 15.41% | Invest with SaxoCapital at risk |
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
This is simply an ETF that tracks either a single or multiple emerging markets. In a similar way that you can use ETFs to invest in developed economies like the UK and the US, emerging market ETFs allow you to invest in the potential growth of these regions.
Although there’s no dictionary definition for an emerging market, it tends to refer to the 24 countries that make up the MSCI Emerging Market Index. This includes countries such as:
They work in a very similar way to other ETFs. There are several emerging market ETFs offered by various investment companies that passively track the overall MSCI Emerging Markets Index, providing wide exposure.
There will also be emerging markets ETFs that focus on specific regions like Latin America, Asia or the Middle East. And there will also be country-specific emerging market ETFs that concentrate on a single country, like China, for example.
You may also come across actively managed emerging markets ETFs, where fund managers will hand-pick investments, but these tend to come with higher fees.
Investing in emerging markets with an ETF can be extremely straightforward and not much different than you’d otherwise invest in ETFs. Here’s a step-by-step guide to explain:
Emerging markets as a whole segment have had a tough time in the last decade. For example, the MSCI Emerging Markets index is down by around 5% in the past 5 years, and is at roughly the same level it was in 2006.
A big part of this poor performance was to do with the global financial crash in 2008 and then emerging markets struggled to recover as low interest rates and accelerating tech companies created ideal conditions for developed regions to swell.
However, the situation we find ourselves in now is very different to the past decade. Emerging markets are growing rapidly, have a fast-growing middle class population and the economies are benefiting from shifting global trade relationships and supply chains.
If you want to keep things simple, a low-cost ETF that tracks the MSCI Emerging Markets Index is probably the best option. But this hasn't performed particularly well in recent years.
The best emerging market ETF in the coming years will depend on which regions manage to achieve not just growth, but profit as well. Luckily, the shifting attitude towards globalisation is creating some great opportunities which may be good news for emerging markets ETFs focusing on areas like Mexico, South Korea, Taiwan and India.
Although emerging markets present some interesting investment opportunities, these regions tend to come with unique challenges that investors should be aware of:
Developing countries are a complex place to invest, but using emerging markets ETFs can be one of the best ways to get exposure to these regions with a simple and cheap investment. It’s hard to predict which emerging market will fare the best in the coming decades, but an ETF allows you to invest in specific regions or all 24 countries.
Emerging markets have underperformed in recent years, but the world is changing. What’s been the best investment in the past won’t necessarily be the best moving forward. Using an emerging market ETF can be an excellent way to add another dimension of diversification to your portfolio. Just be aware that some of these markets come with unique challenges and tend to be more volatile.
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
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