Emerging market equity ETFs offer an attractive category for growth investors or investors seeking to expand their investment horizons with the addition of international investments. The category is one of three large geographical groups that divides investments across the globe. The emerging markets equity universe generally includes emerging market equities from 25 of the world’s emerging market countries. These countries report higher risks and potential returns than the developed markets but lower risks in comparison to the frontier markets.
Emerging market equity investing is often characterized by passive indexes such as the MSCI Emerging Markets Index and the S&P Emerging Markets Broad Market Index which are utilized by fund companies for index replication funds providing broad market exposure. However, with 25 countries this category creates a broad universe for investors and each country offers its own advantages.
For investors seeking to add emerging markets to their portfolio, ETFs can be a great alternative to individual stock picking. Below we provide four of the top funds for investors seeking exposure to the best investments that the category has to offer. Funds were chosen based on one-year total performance return through October 18, 2018.
Direxion Daily MSCI Emerging Markets Bear 3X Shares (EDZ)
- Issuer: Direxion
- Assets under management (AUM): $97.6 million
- 1-Year performance: 20.17%
- Expense ratio: 1.12%
- Price: $65.07
The Direxion Daily MSCI Emerging Markets Bear 3X Shares ETF (EDZ) is the inverse to its counterpart the Direxion Daily Emerging Markets Bull 3X ETF. Direxion is a market leader in leveraged ETFs and EDZ provides an option for investors seeking to go short emerging markets. EDZ takes the bearish position on emerging markets allowing investors to achieve three times the return from shorting the underlying securities in the MSCI Emerging Markets Index with leverage. Investors should keep in mind that leveraged investing can add additional risks. This fund also seeks daily returns which may be optimal for short term traders and only promises three times the returns from shorting the underlying securities for a single day.
The Fund seeks three times the short side performance of the MSCI Emerging Markets Index. Therefore, it uses a short index replication strategy along with the leveraged investing to achieve the targeted results. For the one-year period through October 18, 2018, EDZ is the top performer in the emerging markets ETF category with a total return of 20.17%.
ProShares UltraShort MSCI Emerging Markets (EEV)
- Issuer: ProShares
- AUM: $27.4 million
- 1-Year performance: 15.28%
- Expense ratio: 0.95%
- Price: $54.26
The ProShares UltraShort MSCI Emerging Markets ETF (EEV) is an ETF that offers 2X the short side performance of the MSCI Emerging Markets Index. ProShares is another market leader in leveraged ETFs. It provides a variety of both long and short options on a wide array of market indexes.
EEV has a one-year return of 15.28%. It uses a short index replication strategy with leverage to obtain returns that match the MSCI Emerging Markets Index (-200%).
ProShares Short MSCI Emerging Markets (EUM)
- Issuer: ProShares
- Assets under management: $253.1 million
- 1-Year performance: 9.87%
- Expense ratio: 0.95%
- Price: $20.84
In line with the short side outperformance in the emerging markets over the last year, this short side leveraged fund from ProShares also tops the performance list. It uses a standard short strategy that also involves replication. The ETF seeks to match the inverse returns of the MSCI Emerging Markets Index (-100%).
Of the emerging markets short side ETFs, it is one of the most popular in terms of AUM with $253.1 million in invested assets. EUM offers the least risk of short emerging markets ETF. It can generally be considered one of the safest investments for investors seeking to profit on a downturn in emerging market equities.
Legg Mason Emerging Markets Low Volatility High Dividend ETF (LVHE)
- Issuer: Legg Mason
- Assets under management: $6.3 million
- 1-Year performance: 5.22%
- Expense ratio: 0.51%
- Price: $26.46
The Legg Mason Emerging Markets Low Volatility High Dividend ETF (LVHE) is the fourth ranked top performer by one-year total returns. The ETF has a one-year return of 5.22%. This ETF brings to light the strong performance of low volatility, high dividend stocks in times of descending emerging market stock performance. Across the globe low volatility, high dividend stocks are generally considered to be some of the market’s best long-term value investments. Thus, the outperformance shows that this pocket of the market is holding its ground as emerging market equities selloff.
LVHE trades at approximately $27. It has a low annual expense ratio of 51 basis points. The ETF seeks to track the holdings and return of the QS Emerging Markets Low Volatility High Dividend Index. The Index was created and is sponsored by QS Investors, LLC. Top holdings in the Index and corresponding ETF include: Walmart De Mexico 2.96%, China Mobile Ltd 2.80%, Public Bank 2.79% and Emirates Telecom Group 2.75%.
The Bottom Line
Returns in emerging markets over the past year have been obtained on the short side but low volatility, high dividend stocks have also been positive. The four funds here represent the top one-year total returns including dividends with returns dropping off substantially after LVHE.
In the emerging markets declines in Chinese equities have had a big impact on the one year returns for the emerging markets category overall. As of October 2018, China’s leading Shanghai Index has a one-year return of -24%. Stocks have been affected by the global trade war and several changing dynamics in the country. Investors interested in the emerging markets should maintain a watch on China as its performance along with the other leading BRIC countries (Brazil, Russia, India and China) can often tend to be a guide for the category’s direction.