Emerging markets offer a great way to diversify and tap into high growth.

Highlights Oct.31,2022 21:14

Most U.S. investors hold a high allocation to domestic equities as a "home-country bias," which helps lower currency risk and improve tax efficiency. However, diversifying internationally can be a good idea. Aside from developed markets like Europe, the U.K., Canada, Australia and Japan, developing geographies like China, Russia, India, Africa and South America can offer some enticing opportunities. The economies of these countries are called "emerging markets" and are characterized by fast-rising economic growth. Historically, emerging markets have when U.S. markets faltered. Case in point, from 2000 to 2007 the returns of emerging markets were double that of U.S. markets each year, returning an annualized 15% versus 2.3%. A diversified way of accessing emerging-market stocks without exchanging currency or using American depositary receipts is via an or ETF. Here are the seven best emerging-market ETFs to buy in 2022.

iShares MSCI Emerging Markets ETF (ticker)

EEM offers passive exposure to large- and mid-cap emerging-market stocks. The ETF tracks the MSCI Emerging Markets Index, which holds over 800 stocks from places like China, India, Taiwan, South Korea, Brazil, Saudi Arabia, Mexico and elsewhere. Most of the ETF is concentrated in with information technology and consumer discretionary coming in second and third. Top holdings include Taiwan Semiconductor Manufacturing Co. Ltd. (2330), Tencent Holdings Ltd. (0700), Samsung Electronics Ltd. (005930) and Alibaba Group Holding Ltd. (9988). The ETF hasn't had the best performance over the last decade, posting a 10-year annualized return of 0.37%. However, its return since inception from 2003 is much better at an annualized 7.93%. EEM costs an expense ratio of 0.68%, which works out to $68 annually per $10,000 invested.

iShares Core MSCI Emerging Markets ETF

Long-term investors looking for an affordable emerging-markets ETF might not like EEM given its somewhat high expense ratio. To remedy this, iShares released IEMG, a low-cost offering among its "core" ETF lineup. This ETF is similar to EEM but includes small-cap stocks that EEM excluded because it tracks the slightly different MSCI Emerging Markets Investable Market Index. Overall underlying holdings, geographies and exposures remain similar, making IEMG the better pick unless you're day- or swing-trading EEM and require greater volume and IEMG costs a much lower expense ratio of 0.09%, or about $9 annually per $10,000 invested.

Vanguard FTSE Emerging Markets ETF

Vanguard is known for its lineup of low-cost, broad-market ETFs, and VWO is no exception. This ETF tracks the FTSE Emerging Markets All Cap China A Inclusion Index. In terms of geographical representation, VWO is very similar to EEM and IEMG, with places like China, India, Taiwan, Brazil, Saudi Arabia and South Africa receiving the highest weightings. The notable difference here is the absence of South Korea, as FTSE allocates the country to its developed-market indexes instead. Otherwise, the top holdings are similar, with Taiwan Semiconductor Manufacturing, Tencent Holdings and Alibaba Group among them. VWO costs a low expense ratio of 0.08% and could be an excellent tax-loss harvesting partner for IEMG given they track different indexes but have similar holdings.

Vanguard Emerging Markets Government Bond ETF

The recent turmoil in U.K. government bonds, called gilts, underscores the potential need for geographical when it comes to holdings. Although U.S. government are considered as solid as it gets, there are still risks. In the unlikely event that the U.S. government defaults on its debts, or if interest rates rise too fast, U.S. Treasurys could be dealt a sharp shock. A good diversifier here are government bonds from emerging markets, with VWOB being a great way of accessing them for a 0.2% expense ratio. The higher risk of emerging-market bonds gives VWOB a current yield to maturity of 8.2%, which is almost as high as some domestic

iShares MSCI Emerging Markets Min Vol Factor ETF

An oft-cited rule of thumb in investing is "more risk equals more returns." This is true up to a point, but there is one contradiction: the low-volatility anomaly. Simply put, low-volatility stocks have historically outperformed the market. These are companies with a lower-than-average standard deviation and a measure of sensitivity relative to the overall market. EEMV applies this strategy to stocks in emerging markets as a way to manage risk and decrease drawdowns during market downturns. Therefore, EEMV is not a purely passive index ETF, but rather a "factor" or "smart beta" ETF. It charges a higher expense ratio than its vanilla counterpart IEMG at 0.25%.