Have you considered investing some of your portfolio into Emerging Markets? If so, this article is meant to assist investors in finding the best long-term performance ETFs in the Morningstar category called “Diversified Emerging Markets”. While Emerging Markets have had a long history of great returns, there has also been a long dry spell in the last decade in this asset class. Many value investors have already assessed that reversion to the mean will occur in the future for this asset class, but do not know when. Those who choose to invest in Emerging Markets will no doubt have to endure some pain and significant volatility while holding funds dedicated to this market. Short term, we have little evidence in ETFs that Emerging Markets are lucrative investments. But, long-term, there is considerable evidence that Emerging Markets can be great long-term holdings in a worldwide equity portfolio.
ADRE vs S&P 500: December 2002 – June 2018
Source: https://www.portfoliovisualizer.com/backtest-portfolio
Looking back at the past performance of the oldest ETF available in the Emerging Markets category, we can see that Emerging Markets can do well when held for prolonged periods. The Invesco BLDRS Emerging Markets 50 ADR Index Fund (ADRE) was started in November 2002. During the last 16 years this ETF had a CAGR (compounded annual growth rate) of 10.03% while an S&P 500 index fund had a CAGR of 9.16%. Another advantage of holding some of your portfolio in Emerging Markets is the relatively low correlation coefficient of 0.77 which can create some very beneficial rebalancing opportunities.
One of my investing mentors, Paul Merriman, has published a great article about Emerging Markets on MarketWatch. In his article he explains clearly the long-term performance of this asset class. “We have reliable data for emerging markets going back to 1989. This performance history indicates that the compound return of emerging markets stocks was 11.3%, versus 10.4% for the Standard & Poor’s 500 Index SPX, +1.08% Data sourced for this report comes from Dimensional Fund Advisors.”
Before getting into the performance of the ETFs in this category, it’s good to know which countries are typically in a Diversified Emerging Markets fund. You will usually find Argentina, Brazil, China, India, Indonesia, Mexico, Poland, South Africa, South Korea and Turkey. Egypt, Iran, Nigeria, Pakistan, Russia, Saudi Arabia, Taiwan, and Thailand are other major emerging markets that can be found in these types of funds.
While researching for this article, I found 73 ETFs currently available in the Diversified Emerging Markets category. Only 12 of these have been around for 10 years or longer. I compared each of these 12 ETFs head-to-head to find which ones have the best long-term performance. The top 2 performing in ETFs in this category were small cap funds. Two of the top four funds are offered by WisdomTree and the other two are offered by State Street Global Advisors (SPDR funds).
Source: https://www.morningstar.com/
DGS vs EWX vs DEM vs SPEM: June 2008 – June 2018
Source: https://www.portfoliovisualizer.com/backtest-portfolio
Now, let’s take a deeper dive into the top four performing funds by looking at each fund’s stated objectives and features.
DGS – WisdomTree Emerging Markets SmallCap Dividend Fund seeks to track the investment results of dividend-paying small-cap companies in the emerging markets region. Gain exposure to small cap equity of emerging market dividend paying companies. Use to complement emerging market exposure accessing local economic growth and to satisfy demand for growth potential and income focus.
EWX – The SPDR® S&P® Emerging Markets Small Cap ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P® Emerging Markets Under USD2 Billion Index. Seeks to provide exposure to the small capitalization segment of emerging countries included in the S&P Global Broad Market Index. The selection universe includes all emerging country equites within the S&P Global BMI with market capitalizations between $100 million and $2 billion at the time of inclusion.
DEM – WisdomTree Emerging Markets High Dividend Fund seeks to track the investment results of high-dividend-yielding companies in the emerging markets region. Gain exposure to targeted emerging market all cap equity of high dividend yielding companies. Use to diversify income strategies or substitute for emerging market active and passive strategies. Use to satisfy demand for growth potential and income focus.
SPEM – The SPDR® Portfolio Emerging Markets ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P® Emerging BMI Index. One of the low-cost core SPDR Portfolio ETFs, a suite of portfolio building blocks designed to provide broad, diversified exposure to core asset classes. A low-cost ETF that seeks to offer broad exposure to emerging market equities. Could potentially mitigate country-specific risk.
Bonus Chart: Top 3 Diversified Emerging Markets ETFs vs ADRE
Source: https://www.portfoliovisualizer.com/backtest-portfolio
Diversified Emerging Markets funds can be of great benefit to a worldwide equity portfolio. While there are many funds in this category to pick from, long-term performance should be one of the key factors in making an informed decision. Short-term investors may want to steer away from this asset class due to the inherent volatility of emerging markets. Long-term investors with patience and a higher risk tolerance could potentially reap great rewards for diversifying into an Emerging Markets fund. Although I have highlighted the top four Diversified Emerging Markets ETFs, I believe investors will do well by choosing any of the top 6 funds in this category.
Thank you for taking time to read this article. If you found it useful, please share it with a friend.
Respectfully yours, Micah McDonald, aka the Deep Value ETF Accumulator
Disclaimer: I currently own shares of DGS. I also intend to purchase shares of DEM in the future. I am not a licensed investment advisor. Please perform your own due diligence or seek the advice of a registered investment advisor prior to investing in any fund mentioned in this article.