Fund Spotlight Series: Low Cost Emerging Market ETFs

Emerging market stocks are taking a beating, with many trading near their lowest levels in 2 years. Here are a few emerging market ETFs for investors looking to get in on the action (And all may be commission free depending on your broker!).

Each of the funds below are low cost, passively managed ETFs that give investors access to own the stock of companies in more than 20 different emerging countries. Emerging market funds invest in fast growing, developing countries while avoiding the large developed countries such as those in western Europe, Canada and the U.S. The largest emerging market countries are known as the “BRIC” countries, or Brazil, Russia, India and China. However emerging market funds may spread their investments between different countries differently, as you will see below.

Investing in emerging markets allows investors to diversify away from the U.S. economy and the U.S. dollar. Most financial advisers will recommend portions of your asset allocation to be in international and/or emerging markets (typically between 10% and 30%).

Why is this diversification important? Take a look at the chart below:

S&P500 vs VWO

The green line represents the performance of the S&P 500 index, the blue line represents the performance of Vanguard’s emerging market ETF (discussed in detail below).

Emerging markets have historically provided higher returns than the U.S. market, but are much more volatile. When times are good, emerging markets have historically outperformed the U.S. market, however in the 2008/2009 downturn emerging markets were down 65% or more, compared to the U.S. stock market losing “only” about 50%.

 

With the added risks and rewards in mind, here are the 3 cheapest (in terms of expense ratio) Emerging Market ETFs:

 

SCHE – Charles Schwab Emerging Market Equity ETF

  •  Expense Ratio of 0.15% (The lowest of the 3 featured here)
  • Tracks the FTSE Emerging Index
  • Total holdings: 654
  • Dividend Yield: 2.41%
  • Dividend paid annually.
  • Trades commission free for Charles Schwab account holders.

Breakdown of investments of SCHE by country:

China – 20%

Taiwan – 13%

Brazil – 11.5%

South Africa – 9%

India 8.4%

 

Charles Schwab has really stepped up the game in its ETF offerings in the last year. Charles Schwab now offers 15 ETFs with expense ratios of 0.20% or under, including several that are the cheapest in its category, such as this fund.

This ETF is the cheapest way for investors to get invested in emerging markets. For just 0.15% this ETF gets you invested in over 600 different stocks from 20 different countries!

 

How has the fund performed? We compare the performance of all three funds discussed here toward the end of the article, below.

 

General information on the fund can be found on Charles Schwab’s website here:

http://www.schwab.com/public/schwab/investing/accounts_products/investment/etfs/schwab_etfs/market_cap_index_etfs

The fund’s prospectus can be found here:

http://hosted.rightprospectus.com/ETF/Fund.aspx?dt=P&cu=808524706

 

 

VWO – Vanguard FTSE Emerging Market ETF

  • Expense Ratio of 0.18%
  • Tracks the FTSE Emerging Index
  • Total holdings: 932
  • Dividend Yield: 4.06% (based on last 12 months of dividends – expect it to be more in line with the others over the next year.)
  • Dividends paid quarterly.
  • Commission free for Vanguard account holders.

Breakdown of investments of VWO by country:

China – 20%

Brazil – 13.7%

Taiwan- 13.3%

South Africa – 9.2%

India 8.7%

 

Vanguard adds a few hundred more holdings than SCHE, and for income oriented investors, pays dividends more often.

For investors dependent on income from their investments, Vanguard’s fund is the only fund highlighted in this article that pays quarterly dividends.

Other than those small differences, investors should expect VWO to perform very similar to SCHE, as we will see in the chart below, comparing the three funds’ performances.

 

More information on the fund can be found on Vanguard’s site, here:

https://personal.vanguard.com/us/funds/snapshot?FundId=0964&FundIntExt=INT#tab=2

The fund’s prospectus can be found here:

https://personal.vanguard.com/funds/reports/sp964etf.pdf?2210077251

 

 

IEMG – iShares Core MSCI Emerging Markets ETF

  •  Expense Ratio of 0.18%*
  • Tracks the MSCI Emerging Markets Investable Market Index
  • Total holdings: 1778
  • Dividend Yield: 2.08%
  • Dividends paid semi-annually (End of December and end of June).
  • Commission free for Fidelity account holders.

* – expense ratio based on a 0.06% fee waiver. Keep an eye on the fund to ensure the waiver remains in effect.

Breakdown of investments on IEMG by country:

China – 20%

South Korea – 16%

Taiwan – 13%

Brazil – 10.5%

South Africa – 7.4%

 

IEMG follows a different index that considers South Korea an emerging market (the other funds above have no investments in South Korea). This, along with the nearly 1800 holdings leads to a slightly different portfolio weighting than the two funds above. How does this affect the fund’s performance? Check it out below.

 

More information can be found on iShare’s website here:

http://us.ishares.com/product_info/fund/overview/IEMG.htm

The fund’s prospectus can be found here:

http://prospectus-express.newriver.com/summary.asp?clientid=isharesll&fundid=46434G103&doctype=pros

 

In Conclusion

Each of the three funds above provide investors a cheap and easy way to spread out their investments around the world. We noticed several slight differences in the funds above, how has that affected their performances?

VWO vs SCHE vs IEMG 2

From the chart above you can see the effect of IEMG following a different index than VWO and SCHE. Notice VWO and SCHE in lockstep over the last 2 years. Even though Vanguard has a few hundred extra holdings, the holdings are so little of a percentage of assets that it does not make a noticeable difference in performance.

 

In the long run, the performance gap should not be significant. Any one of these three funds will do a great job of diversifying your investments and hopefully supplying your portfolio with a little extra growth.

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