Many of you have been asking for information on investing in Emerging Market ETF’s, so we have made a small intro for you! Over the coming few days we will be adding more and more info on Investing in EM ETFs to the website so keep an eye out.
1. What is an ETF?
An Exchange Traded Fund (ETF) is a kind of security that involves a bunch of securities that tracks an underlying index. ETFs may encompass many types of investments, including equities, commodities, or bonds. A “physical” ETF replicates the performance of an underlying index by investing directly in its components (a S&P500 ETF will thus invest in Apple, Nike, J&J, etc., giving each security the same proportion as in the index). A “synthetic” ETF replicates the performance of an underlying index using derivatives and swaps rather than physical securities. Providers enter into a swap with a counterparty that ensures that future cash flows supported by the underlying benchmark are returned to the initial investor. Most people views ETFs as “passive management” strategy for the investors given they are supposed to replicate perfectly underlying assets but some funds try to outperform the index based on historical performance (i.e “active management).
2. What is an EM ETF and what are the main funds?
Emerging Market ETFs are ETFs where the underlying assets are located in the emerging market countries. Most popular EM index may include MSCI Emerging Markets Index (mainly composed of Chinese companies, followed by South Korea, Taiwan, India and South Africa companies) or MSCI Frontier Markets (including developing countries such as Kuwait, Argentina or Morocco). Below is a non-exhaustive list of some ETFs:
• iShares MSCI EM UCITS ETF USD
• iShares Core MSCI EM IMI UCITS ETF
• SPDR®️ MSCI Emerging Markets UCITS ET
• SPDR®️ MSCI ACWI IMI UCITS ETF
• Vanguard FTSE Emerging Markets UCITS
• Avantis Emerging Markets Equity ETF
• BMO MSCI Emerging Markets Index ETF
• AMUNDI MSCI EMERGING MARKETS UCITS ETF
• Lyxor MSCI Emerging Markets UCITS ETF
3. Pros and Cons
Emerging market exchange-traded funds have been very popular in recent months supported by material outperformance and strong expected growth. Investing in emerging markets is viewed as a way to benefit from both the fastest growth in the world while being a low-cost investment. Indeed, fees for emerging market ETFs tend to have a lower fees range than EU/North America ETFs. However, some investors continue to believe that investing in emerging markets is a source of unknowns and unpredictability. It is well-known that emerging markets are much more volatile and riskier than developed markets. In fact, it is probably because they are riskier that they are more profitable. Investors must also consider currency risk noting that currencies like South Africa’s rand, Turkey’s lira or India’s rupee have been challenged over the past months.