In today’s rapidly changing world, seeking higher long-term returns is a key driver for smart investors. Emerging markets exchange-traded funds (ETFs) are one of the most popular options to access the growth potential in developing economies. I’m going to walk you through exactly how to invest in emerging markets ETFs, the benefits, possible risks, and the best strategies for building enduring wealth.
Key Takeaways
Emerging markets ETFs offer exposure to fast-growing economies and diversification benefits.
They can boost long-term returns but come with higher volatility and some unique risks.
Investing requires choosing the right ETF, brokerage, and allocating appropriately in your portfolio.
Automated investing platforms like M1 Finance make it easy to buy and manage ETFs.
Consistent investing, rebalancing, and staying informed are key to success.
What Are Emerging Markets ETFs?
Let’s start with the basics. Emerging markets ETFs are funds that track stocks (sometimes also bonds) from developing countries. Think of regions like China, India, Brazil, South Africa, Indonesia, and Eastern Europe. These funds allow you to invest in dozens or hundreds of companies from these economies in a single share, providing broad, diversified exposure.
Why Investors Choose Emerging Markets
Historically higher GDP growth rates (often 3-6%) versus developed nations.
Rapidly growing middle classes, technology adoption, and urbanization.
Lower starting valuations compared to U.S. or European equities.
Potential for higher returns—MSCI Emerging Markets Index returned an average of 9.5% annually from 2000 to 2020 (though with higher volatility).
How ETFs Simplify Emerging Markets Investing
Attempting to pick individual stocks from countries you may never visit is daunting. ETFs offer a simple, low-cost way to access entire regions. Most major brokers and investing apps offer several emerging markets ETF options, including large, mid, and small-cap focus, or by specific country or sector.
Benefits of Investing in Emerging Markets ETFs
Why go international? Here are the most important reasons investors, myself included, turn to these funds as part of a diversified portfolio.
1. Higher Long-Term Growth Potential
Emerging economies often grow much faster than the US or Europe. For example, India’s GDP grew by 6.8% in 2022, compared to 2.1% for the US. That economic expansion can translate to stronger earnings growth and, over time, higher stock market returns.
2. Diversification
Holding only US stocks exposes you to one country’s fortunes. Emerging markets often have different growth drivers—they might do well when the US stalls. Adding even 10-20% emerging market allocation can reduce your portfolio’s volatility over decades.
3. Access to Unique Opportunities
Tech giants like Taiwan Semiconductor (TSMC) or Alibaba.
Massive banks and resource companies in Brazil, Indonesia, or South Africa.
Young, urbanizing populations—over 85% of the world’s youth under 30 live in emerging markets!
Risks and Challenges of Emerging Markets ETFs
Let’s be honest—emerging markets aren’t for the faint of heart, and they’re not a ‘set it and forget it’ investment. Here are some key risks to weigh:
1. Political and Currency Risk
Governments may be less stable, and currencies can swing wildly. For example, in 2021, the Turkish lira fell over 40% against the USD, crushing returns for local investors. ETFs help mitigate this by diversifying, but it’s always a factor.
2. Volatility
Emerging market ETFs can swing 20% or more in a year—double or triple the US market’s typical moves. Between 2010 and 2020 the MSCI Emerging Markets index saw multiple double-digit declines and recoveries.
3. Lack of Transparency and Varying Standards
Corporate governance may be weaker—think accounting scandals or government interference.
Regulatory and reporting standards aren’t always up to US/Europe levels.
Liquidity can be lower, especially for small companies and frontier markets.
How to Choose the Right Emerging Markets ETF
With dozens of options, picking the best fund matters. Here’s my personal due diligence checklist to help you select wisely.
1. Understand Fund Structure and Index
Broad vs. Narrow Focus: Some ETFs invest across 20-30 countries (e.g., Vanguard FTSE Emerging Markets ETF – VWO), while others target specific regions/countries (like iShares MSCI China ETF).
Market Cap: Broad funds tilt toward large companies, but consider whether you also want mid- or small-cap exposure.
Index Provider: Most track established indices (MSCI, FTSE, S&P) for reliable rules and global standards.
2. Check Fees and Expenses
ETF management fees (expense ratios) for emerging markets are higher than US index funds, but still reasonable. Look for fees under 0.5% where possible—every dollar saved adds up over the years.
3. Liquidity and Volume
Larger funds (like VWO or EEM) trade in huge volumes, so you’ll pay less in bid-ask spreads. Aim for funds with at least $1B in assets to ensure liquidity.
4. Dividend Policies and Tax Withholding
Some ETFs distribute dividends, but investors might be subject to foreign withholding taxes. Check how taxes are handled by your platform—tools like Personal Capital can help track your portfolio’s income strategies and optimize for taxes.
How to Invest in Emerging Markets ETFs Step-by-Step
Ready to add some international flair to your portfolio? Here’s a simple process I recommend for beginners and experienced investors alike.
1. Pick a Trusted Investing Platform
Robinhood for zero-commission trading and instant ETF access.
Acorns lets you invest spare change into diversified portfolios with emerging markets exposure.
M1 Finance for automated, hands-off portfolio management including global ETF allocations.
Most traditional brokers (Fidelity, Charles Schwab, Vanguard) also support a broad range of ETFs.
2. Fund Your Account and Determine Allocation
Ideally, allocate 10-20% of your equity portfolio to emerging markets based on your risk tolerance.
Consider dollar-cost averaging (investing the same amount monthly/quarterly) to smooth out market volatility.
Use retirement accounts (IRAs, 401ks) to defer taxes on dividends and gains if possible.
3. Select Your ETF(s) and Place Your Order
Type the ETF ticker into your platform, enter the dollar amount or number of shares, and hit ‘buy.’ With fractional shares available on Stash or Robinhood, you don’t need thousands to get started.
4. Monitor, Rebalance, and Stay the Course
Check your allocation quarterly; rebalance if emerging markets outperform/underperform by more than 5% of your target.
Stay updated on global news and economic trends but don’t let short-term volatility shake your resolve.
Consider setting up auto-investing and portfolio tracking tools like Personal Capital for added peace of mind.
Top Emerging Markets ETFs in 2024
What are the leading options this year? Here’s a quick roundup of some of the most popular, liquid emerging markets ETFs—suitable for both beginners and advanced investors:
Vanguard FTSE Emerging Markets ETF (VWO): 5,000+ stocks, 0.08% expense ratio, $80B+ in assets.
iShares MSCI Emerging Markets ETF (EEM): Tracks MSCI index, highly liquid, 0.72% expense ratio, $22B in assets.
Schwab Emerging Markets Equity ETF (SCHE): 1,800 stocks, 0.11% expense ratio, very low costs, $11B in assets.
iShares Core MSCI Emerging Markets ETF (IEMG): Broad coverage, 0.09% expense ratio, $71B in assets.
FlexShares Emerging Markets Small Cap ETF (TLTD): Focuses on small- and mid-caps, 0.42% expense ratio.
Tip: All of the above are available on Robinhood, M1 Finance, and most major brokerages, making them easy to buy in minutes.
Strategies to Maximize Returns from Emerging Market ETFs
How can you generate the highest possible long-term returns — while keeping risks in check? Consider these practical strategies I use in my own portfolio:
1. Diversify Within Emerging Markets
Don’t just pick one country or sector. Choose ETFs with broad exposure (20+ countries and varied industries). Consider adding a small-cap or consumer-focused ETF for extra growth potential.
2. Use Dollar-Cost Averaging
Invest a fixed amount monthly/quarterly instead of lump-sum investing. This averages out your purchase price and reduces the risk of buying at a market peak. Platforms like M1 Finance and Acorns make automated recurring investments simple to set up.
3. Rebalance Annually or As Needed
Sell a bit if EMs surge above your target, or add more if they underperform. This forces you to buy low, sell high. Many robo-advisors, like Betterment, do this automatically.
4. Hold for the Long Term
Emerging markets can lag for years—between 2013 and 2020 they often underperformed US stocks. But the 2000s saw EMs soar over 200%. Commit for at least 5-10+ years and avoid emotional selling during downturns.
5. Monitor Currency Trends
If the US dollar weakens, emerging markets typically outperform.
Consider hedged ETFs if you’re especially risk-averse, but know these often lag unhedged funds over the long term.
Emerging Markets ETFs vs. Developed Markets ETFs
You might be wondering: why not just buy a global ETF or stick with the US?
Growth vs. Stability
Emerging markets offer higher potential returns in exchange for greater risk and volatility.
Developed market ETFs (Europe, Japan, Canada, Australia) provide more stability and lower average growth.
The MSCI World ETF returned about 7% annually since 2000, while the MSCI Emerging Markets ETF returned about 9.5% but with more dramatic swings.
Which is Best for You?
Growth-oriented investors (age 20-45) can afford a higher EM allocation (e.g., 15-20%).
Conservative or approaching retirement? Consider limiting EMs to 5-10% for extra diversification without added volatility.
Tax Considerations and Account Types
Taxes can eat into your returns, but a bit of planning helps:
Hold emerging market ETFs in tax-advantaged accounts (IRAs or Roth IRAs) to defer or avoid taxes on capital gains and dividends.
Foreign withholding taxes may apply to dividends. Some funds recoup these, others do not—read the fund’s prospectus.
Personal Capital and Betterment both offer tax optimization tools—even basic portfolio tracking will help you keep more of your gains.
Bonus: Fund Your Portfolio with Extra Income
If you want to boost your investing budget, consider earning extra cash through online platforms like Swagbucks or Survey Junkie. Every bit adds up—and investing those extra earnings can supercharge long-term wealth growth.
Common Mistakes to Avoid with Emerging Market ETFs
Over years of investing (and guiding my coaching clients), I see a few recurring mistakes. Here’s how to avoid them:
Going All-In: Don’t bet your retirement on emerging markets alone—diversify extensively.
Chasing Past Performance: Yesterday’s winners might lag next year. Stick to your plan and rebalance.
Ignoring Fees and Taxes: Small fees erode returns—use low-cost brokers and tax-advantaged accounts.
Underestimating Volatility: Prepare for -30% years and don’t panic. Emerging markets require a long horizon and strong nerves.
Neglecting Research: Always read your ETF’s prospectus, understand what you own, and use tools like Personal Capital for tracking and insight.
Final Thoughts
Investing in emerging markets ETFs is one of the most powerful ways to diversify and pursue higher long-term returns. The key is thoughtful allocation, choosing the right funds, and sticking with your strategy through ups and downs. I suggest starting with a modest allocation—say, 10% of your portfolio—in one or two broad, low-cost ETFs. Reinvest dividends, rebalance every year, and let your investments compound over decades.
If you’re ready to build a robust, global portfolio, check out brokers like Robinhood, automate growth with Acorns or M1 Finance, and track your progress with Personal Capital. With a bit of research and a steady hand, emerging markets can be a rewarding part of your passive income journey. Start today and let global growth work for your future!
