Thinking of investing in emerging markets like India or Taiwan but not sure how to go about it? Putting your money into individual stocks within these countries can be tricky, but emerging market exchange -traded funds (ETFs) allow you to easily invest from right here in Australia.

But, are there any benefits to investing in them? Let’s find out.

What are emerging market ETFs?

First up, let’s look at the definition of ‘emerging markets’. These are simply countries or regions experiencing rapid industrialisation and economic growth – typically at much higher rates than developed economies.

Numerous areas around the world are considered emerging markets, but some of the most common when it comes to investing include India, China, Taiwan, South Korea, Indonesia, Thailand, Mexico, and Brazil.

Put simply, emerging market ETFs give investors exposure to these markets in a single, usually fairly low-cost trade.

It’s certainly possible to invest in ETFs that track indices in individual countries (such as India or China). However, emerging market ETFs usually contain a basket of securities from across multiple regions. For example, a single ETF might contain holdings from across the Asia-Pacific region. Or, it may even go global and include stocks from India, Taiwan, South Korea, and Latin American countries like Brazil and Mexico.

There are lots of reasons why investors trade in emerging market ETFs, which we’ll go into further down. But the primary reason is that these markets are often poised for strong growth – which would result in a solid jump in value for the stocks within the ETF, and the ETF itself.

How do they differ from other specific ETFs?

There are so many types of ETFs to invest in, whether they’re in emerging or developed markets.

These include:

• equity ETFs, such as
  • sector ETFs
  • thematic ETFs (those that focus on certain trends and the investments that benefit from these trends)
  • dividend ETFs (those that track dividend-paying stocks)
  • market-cap index ETFs (funds that pick stocks based on the size of different companies’ market cap).

Then there are non-equity ETFs that track particular commodities or currencies, or contain bonds.

Many emerging market ETFs are fairly broad and will typically contain equities from several different industries, like energy, IT, materials and finance – these are known as diversified ETFs. Although, there are several that invest in specific sectors, such as tech or e-commerce. Some focus on dividend-paying stocks, currencies, or government or corporate bonds.

The main point of difference with an emerging market ETF is that it only tracks emerging markets, not those that are already developed. For example, an Australian sector ETF like BetaShares Resources Sector ETF tracks the biggest resources companies in Australia. In contrast, an emerging market ETF might follow resources companies from across multiple emerging markets.

What are some examples of emerging market ETFs?

There are numerous emerging market ETFs to choose from, but here are a couple of examples to give you an idea of what they invest in and how they work.

Vanguard FTSE Emerging Markets ETF

This is the biggest of all emerging market ETFs by total assets under management (AUM). Vanguard FTSE Emerging Markets ETF (VGE) currently has around $726.48 million in assets and primarily contains a broad range of stocks across different industries in China, India, and Taiwan. It tracks the return of the FTSE Emerging Markets All Cap China A Inclusion Index.

SPDR S&P Emerging Markets Carbon Control Fund

The SPDR S&P Emerging Markets Carbon Control Fund (WEMG) is slightly more niche. Rather than containing stocks from multiple industries, it applies certain rules to the companies it follows – namely around their sustainability standards.

It tracks the S&P Emerging LargeMidCap Carbon Control Index, which comprises companies that are working to massively reduce their carbon intensity. These enterprises also boast decent environmental, social and corporate governance (ESG) ratings and don’t gain any revenue from harmful industries or practices.

Why do some long-term investors choose emerging market ETFs?

For long-term investors, there may be several advantages to investing in emerging market ETFs.

They have the potential for strong growth

Because emerging markets tend to be expanding quite rapidly, they offer huge growth potential compared to developed markets like the US and Australia. In fact, according to the International Monetary Fund, emerging markets have contributed nearly 80% of global economic growth since 2008’s GFC.

These markets also tend to be very rich in natural resources and are more rapid in their progression with technology – both sectors that can deliver good returns.

Of course, all markets are susceptible to risk, and emerging markets are no exception. However, by investing in emerging market ETFs, investors hope to capitalise on this growth and possibly see some decent ROI.

It's easier to invest in foreign markets

Some markets are notoriously tricky to invest in if you’re a foreign investor. If you want to invest in individual stocks, you may have to go through a lengthy application process and keep separate trading accounts in each market, often via a local securities firm.

However, emerging market ETFs often make foreign investing much easier. They can be found on major stock exchanges (including the ASX), which makes them both very liquid and comparatively simple to trade.

They allow for further diversification

Diversification should be a key part of any investing strategy, and emerging market ETFs allow for a better assortment of investments.

By investing in foreign markets, investors can enjoy greater diversification across a range of regions and industries, potentially lowering the risk of only investing in one market or sector.

What are the risks associated with emerging market ETFs?

While there are obvious upsides to investing in emerging market ETFs, they’re not without their risks. Below are a few things to consider before diving in head first.

They can be more volatile

The very nature of emerging markets is that they can be quite volatile. They’re subject to political turmoil; currency variations; less transparency and regulatory oversight; underdeveloped financial markets; and different business cycles. For example, many emerging markets export a huge volume of commodities such as oil and metals, which tend to be in a pattern of ‘boom-and-bust’.

While investing in ETFs rather than individual stocks may be less unstable, it’s worth keeping in mind that ETFs can still fluctuate in value. They really just reflect the value of the investments within them, so if there’s a market-wide drop within a particular country, it could impact the ETF’s worth.

They may be more expensive to invest in

Though not always the case, many emerging market ETFs have higher expense ratios (effectively operating costs) than those that invest in established markets.

There are several reasons for this, including the fact that emerging markets are more difficult to invest in, they require more research, they’re riskier, and they often need to be monitored more vigilantly.

So, should you invest in emerging market ETFs?

Ultimately, the decision on whether to invest in emerging market ETFs is entirely yours. Hopefully, though, the insight provided above makes that decision a little easier.