Investing in Emerging Markets with ETFs

Executive Summary

  • Although near term uncertainty is present due to the slowing global economy and persistent inflation, long term outlook for the Emerging Markets is positive.
  • Faster growth rates, better balance sheets and decoupling from developed markets are the foundation for the investment story.
  • Multiple ways to gain exposure with ETFs:

Total Emerging Markets: EEMVWO,GMMPXH

Large Cap: ADRE

Small Cap: DGSEWX

Speciality: DEMPIE


Fixed Income: PCYEMB

  • Also, several single country ETFs provide exposure to Emerging Markets.

Investment case

Emerging markets include Brazil, Russia, India and China as well as Taiwan, Argentina, Turkey, Pakisan and others.

Faster Growth

Emerging market economies are generally growing at a faster rate than the developed world and this is set to continue for many years.

The economies are increasingly driving their own growth as domestic consumer spending and trade between emerging market countries are becoming much more important.

As a result, emerging markets rely less on global economic growth than in the past.

Improving Balance Sheets

Emerging markets have better overall economic fundamentals than the developed world, in terms of current account balances and government debt.

There has also been structural improvements across many of these countries in recent years, with foreign debt levels down sharply and increased foreign exchange reserves.

Recent Trends

Several of the emerging economies have large oil sectors and have been helped by rising energy prices. Brazil was helped recently by rating upgrades to investment class from S&P and Fitch.

India has been held by back by concerns about domestic inflation, which recently reached 8.1%.

Despite hope for a lift from the upcoming Olympics, China has been hurt by a severe earthquake in Sichuan province tightened monetary policy to control inflation which has risen to 8.5%.

Taiwan’s dependence on exports to the US tech sector is also a near term concern.

Long Term Outlook

Although there is near term uncertainty due to the potential for a global recession and a constant battle against inflaction, the medium to long-term investment case for emerging markets remains compelling.


The popularity of Emerging Markets investing has lead to the introduction of several types of ETFs.

Total Emerging Markets

The most popular ETF is iSharesMSCI Emerging Markets Index Fund (EEM) which tracks an index that captures 85% of the market capitalization of the emerging markets.  Vanguard has a similar offering with a lower expense ratio of only 0.25% – the $6 billion Vanguard Emerging Markets ETF (VWO).

Other ETFs that capture most or all of the emerging markets include State Street’s SPDR S&P Emerging Markets ETF (GMM) and PowerShares FTSE RAFI Emerging Markets Portfolio (PXH).

Market Cap

The single large cap ETF isPowerShares BLDRS Emerging Markets 50 ADR Index Fund(ADRE).  Two small cap offerings include the WisdomTree Emerging Markets SmallCap Dividend Fund(DGS) and the recently introducedSPDR S&P Emerging Markets Small Cap ETF (EWX).


For dividend investors, WisdomTree also offers the Emerging Markets High-Yielding Equity Fund (DEM)

Technical investors can choose theDWA Emerging Markets Technical Leaders Portfolio (PIE)


Two ETFs are available for taking short positions on the Emerging Markets.  ProShares’ Short MSCI Emerging Markets (EUM) andUltraShort MSCI Emerging Markets (EEV) enable investors to hedge their portfolios without having to borrow shares.

Regional Funds

State Street has introduced a series of regional Emerging Market ETFs that cover the Middle East and Africa (GAF), Latin America(GML), Asia Pacific (GMF) andEurope (GUR).

In addition single country ETFs are available for some of the emerging market economies (e.g. see Investing in Brazil with ETFs).

Bond Funds

Fixed income ETFs are also an option for Emerging Markets investors.  The PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) and the JPMorgan USD Emerging Markets Bond Fund (EMB) are the two choices.

Top Performers


1. iShares MSCI Emerging Markets Index Fund (EEM) – $27.2 billion

2. Vanguard Emerging Markets ETF (VWO) – $6.1 billion

3. PowerShares BLDRS Emerging Markets 50 ADR Index Fund (ADRE) – $900 million

Lowest Cost

1. Vanguard Emerging Markets ETF (VWO) – 0.25%

2. PowerShares BLDRS Emerging Markets 50 ADR Index Fund (ADRE) – 0.30%

3. PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) – 0.50%

See the directory.