Manie Marais: Meet Emerging Market ETFs, which are now ready to deliver

Key points:.EM ETFs offer diversification and growth in developing economies.EM markets outperformed the S&P 500 and MSCI World from 2001–2020.Global AI trends signal a potential resurgence for EM investments..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here..The seventh BizNews Conference, BNC#7, is to be held in Hermanus from March 11 to 13, 2025. The 2025 BizNews Conference is designed to provide an excellent opportunity for members of the BizNews community to interact directly with the keynote speakers, old (and new) friends from previous BNC events – and to interact with members of the BizNews team. Register for BNC#7 here..If you prefer WhatsApp for updates, sign up to the BizNews channel here.By Manie Marais.Emerging Markets Exchange-Traded Funds (ETFs) have become increasingly popular among investors seeking to diversify their portfolios and tap into the growth potential of developing economies. To understand these investment vehicles, it's crucial to first examine the underlying indices they track and their relationship to broader global market indices. .The incredible outperformance of the USA (and the US Dollar) over the last 10-15 years has left the rest of the world behind, especially in company valuation..It may be time to consider investing worldwide, and emerging markets are one area where the tide may be turning. After the dotcom bubble, the EM markets outperformed for many years, and as we face a similar setup with the Global AI Revolution, some exposure to EM may be prudent investment advice. .EM markets performed poorly in recent memory but have a look at the astonishing returns provided by EM Markets vs the S&P 500 and MSCI World for the period of 1 January 2001 to 31 December 2020..Given an investment of $10,000 on 1 January 2001 the investment would have yielded approximately $66,589 (MSCI EM), $32,202 (MSCI World) and $42,219 (S&P 500)..Cumulative performance figures (in USD):.Calendar performance figures (in USD):.Understanding Global Market Indices.MSCI Emerging Markets (EM) Index.The MSCI Emerging Markets Index serves as a benchmark for emerging market equity performance. As of the latest data, it includes stocks from 24 emerging economies, with the following top country allocations:.• China: 27.9%.• Taiwan: 15.1%.• South Korea: 12.3%.• India: 15.1%.• Brazil: 5.1%.• Saudi Arabia: 4.2%.• South Africa 3.6%.Rebalancing: The index is reviewed and potentially rebalanced four times a year (February, May, August, and November) to reflect ongoing changes in emerging equity markets..MSCI World Index.The MSCI World Index is a widely followed global stock market index that tracks the performance of approximately 1,500 large and mid-cap companies across 23 developed countries.This index has been calculated since 1969 and includes stocks from nations such as the United States, Japan, the United Kingdom, and other advanced economies..However, it's important to note that despite its name, the MSCI World Index does not include emerging markets..MSCI All Country World Index (ACWI).The MSCI All Country World Index (ACWI) provides a more comprehensive view of global equity markets. This index tracks the performance of stocks from both developed and emerging markets, covering 23 developed and 24 emerging market countries..As of 31 December 2024, the ACWI comprises nearly 3,000 companies, offering a broader representation of global equity market performance. .I key difference of the MSCI ACWI is the Emerging Market representation..While the ACWI includes both developed and emerging markets, it's crucial to understand the weight distribution:.• Developed Markets: 90.32% of the index.• Emerging Markets: 9.68% of the index.This breakdown illustrates that while emerging markets are included, they represent a relatively small portion of the overall index..Emerging Markets ETFs.Emerging Markets ETFs are investment funds that focus specifically on stocks from emerging market economies, such as those in Latin America, Asia, Eastern Europe and some African nations..These ETFs offer investors a way to gain exposure to the potentially high-growth economies that are transitioning from closed systems to market economies..Some key features of Emerging Markets ETFs include diversification, growth potential, and liquidity. However, they also come with significant risks, primarily political and regulatory uncertainties, as well as currency fluctuations. The strong US Dollar over the last few years has been a headwind for emerging markets..Emerging Markets ETFs provide investors with a convenient way to access the growth potential of developing economies while potentially mitigating some of the risks associated with direct investment in these markets. As with any investment, it's essential to consider your financial goals, risk tolerance, and overall portfolio strategy when deciding whether to include Emerging Markets ETFs in your investment mix..There are three primary ways to access emerging markets through an ETF approach. You can choose country-specific ETFs that focus on individual nations within emerging markets, providing targeted exposure. Alternatively, you can invest in broad emerging market ETFs that track established benchmarks like the MSCI Emerging Market Index, offering diversified exposure across multiple countries. Lastly, you can opt for smart beta ETFs, which aim to outperform traditional indices by employing advanced strategies, such as factor-based investing. Each approach caters to different investment goals and levels of risk tolerance..Country-specific ETFs have shown significant variation in performance over the past year. The Argentina and Pakistan indices have delivered impressive returns of 64.70% and 84.80%, respectively, while Peru posted a 23.70% gain. Notably, none of these countries are currently included in the Emerging Markets (EM) Index. Conversely, Mexico experienced a negative return of -26.90%, while South Africa's 25/50 Index recorded a modest yet positive return of 7.50%..It is a bit like playing the lotto to try and pick specific countries to invest in, so I will discuss the different possible broader-based ETFs based on the EM Index and a basket of countries to mitigate the country-specific risk of picking individual countries..Examples of Emerging Markets ETFs.There are numerous ETFs that employ different approaches to track emerging markets. We will discuss one of the basic "plain vanilla" ETFs EEM, as well as a few other approaches..With a vast universe of ETFs available, it is essential to carefully study and evaluate them to make informed investment decisions..ETF Investment Approaches and Allocations.iShares MSCI Emerging Markets ETF .• Holdings: 1,208.• Country Allocation: China (27%), India (20%), Taiwan (19%), South Korea (9%), Brazil (4%), South Africa (3%) and other combined (18%)..• Approach: Closely tracks the MSCI Emerging Markets Index, it has a slightly smaller number of holdings and may have minor differences in market capitalization coverage due to its structure as an ETF. However, it still provides broad exposure to emerging market equities, capturing a similar percentage of market capitalization as the underlying index..Freedom 100 Emerging Markets ETF.• Holdings: 112.• Country Allocation: Taiwan (32%), Chile (18%), Poland (14%) South Korea (13%), South Africa (6%), Brazil (4%) and others combined (13%)..• Approach: Uses personal and economic freedom metrics as primary factors in stock selection, excluding companies with 20% or more state ownership..VanEck MSCI Multifactor Emerging Markets Equity ETF.• Holdings: 225.• Country Allocation: India (25%), China (24%), Taiwan (24%), South Korea (11%), Brazil (2%) and other combined (14%)..• Approach: Focuses on value, low size, momentum, and quality factors to potentially outperform market capitalization-weighted benchmarks..iShares MSCI Emerging Markets ex China ETF.• Holdings: 685.• Country Allocation: India (27%), Taiwan (27%), South Korea (12%), Brazil (6%), South Africa (4%), 0% China and other combined (24%)..• Approach: Focuses on large- and mid-cap companies in emerging markets, excluding China..Annualized performance figures (in USD):.Investment Considerations.The once-in-a-lifetime outperformance of the Magnificent 7, comprising Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla over recent years has increased their collective weight in major indices over time, with these seven stocks alone accounting for nearly 30% of the S&P 500 index's weight, leading to concerns about market concentration risk for some investors. .The outsized influence of these companies has led to their performance having a disproportionately positive impact on overall market returns. However, with valuations potentially reflecting full pricing, the downside risk becomes more considerable..An ETF strategy for emerging markets (EM) can indeed be a more prudent approach to navigating the complexities and risks associated with these dynamic economies, particularly when compared to selecting individual countries or stocks while capitalising on the benefits of diversification, lower volatility and cost-effective market access..An EM ex-China ETF, combined with a separate China allocation if desired, may provide the flexibility to manage risks and opportunities more effectively in this complex and evolving market landscape..Another significant factor in the US outperformance over the last decade or more was the dominant US dollar. It is not inconceivable that in the next few years, the dollar may lose some of its strength. It is significant that in the years of EM outperformance (2001-2010) the US Dollar Index (the relative value of the dollar against major currencies) fell from 108.8 to 80.2 (a weaker dollar by 26.3%)..Currently, EM markets are cheap, so it is worthwhile to consider an EM allocation to portfolios..Read also:.🔒 Global investors shift focus to emerging markets for the next AI wave🔒 Global markets brace for Fed easing amid 36-hour rate rollercoasterMarkets ride high on speculative frenzy, ignoring bubble warnings and inflation fears.Disclaimer:."This article is for informational purposes only and does not constitute financial advice. Readers should consult a licensed financial advisor before making investment decisions."

Manie Marais: Meet Emerging Market ETFs, which are now ready to deliver

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