Diversifying your portfolio is always a sound investment strategy. Being overly weighted in one sector can lead to underperformance if that particular market tanks. One area to add to your portfolio is emerging markets. It's a great way to gain exposure through ETFs.
What are emerging markets ETFs?
Emerging markets are smaller markets or industries that are beginning to create momentum. They can possess significant potential gains for investors who get on board early. Emerging markets ETFs are funds that pool money from large groups of investors. The funds are then invested in particular emerging market assets.
The two types of emerging markets are emerging economies and emerging industries. Emerging economies are economies that are growing quickly. Some of the most popular emerging economies among investors include China, Brazil, India, Taiwan, Russia, and South Korea. Emerging industries are industries that deal in relatively new products or services. One such sector has been teleconferencing technology as a result of the COVID-19 pandemic. Tech companies that develop software that enables face-to-face interactions have created an emerging market.
Vanguard FTSE Emerging Markets ETF (VWO)
The Vanguard FTSE Emerging Markets ETF (VWO) is the most significant emerging markets ETF with approximately $60 billion in total assets. The size of the ETF means that investors can participate with minimal expense ratios. In fact, VWO charges only 0.10 percent or $1 for every $1,000 invested.
Currently, VWO invests in more than 5,000 stocks from over 25 different countries. The stocks include e-commerce giant Alibaba Group (BABA), Tencent Holdings (TCEHY), and chipmaker Taiwan Semiconductor (TSM). At 42 percent of the fund, Chinese companies have the most representation, followed by Taiwan at 15.4 percent, and India at 9.4 percent.
The SPDR Portfolio Emerging Markets ETF (SPEM)
The SPDR Portfolio Emerging Markets ETF (SPEM) makes up State Street's 22 ETF "building blocks." This group of funds is meant to provide investors with a low-cost core of ETFs that help create a well-diversified portfolio.
SPEM tracks the S&P Emerging BMI (Broad Market Index), which is a subset of the S&P Global BMI. The fund’s top 10 holdings account for about 23 percent of the total portfolio. The top three sectors are financials (21.1 percent), consumer discretionary (17.6 percent), technology (13.5 percent), and communication services at 12.3 percent.
The Schwab Emerging Market Equity ETF (SCHE)
Charles Schwab is another one of the most trusted investment firms. The Schwab Emerging Market Equity ETF (SCHE) has over $9 billion in assets under management. Although it's smaller than some emerging markets ETFs, SCHE focuses on some of emerging markets largest companies.
SCHE has a similar structure to the previous two ETFs. It features China and financials, but the investment pool is smaller with about 1,600 total companies. This means that the fund does away with the smaller companies. The emphasis on larger stocks might be appealing for investors looking for larger-cap stocks in the area of emerging markets.