What it means
An exchange-traded fund, or ETF, pools money from many investors to buy a collection of assets. Investors own shares in the fund, and the price moves during the trading day.
An emerging market ETF focuses on countries such as those in Asia, Latin America, Eastern Europe, the Middle East and Africa. Most of these ETFs are passive, meaning they follow an index rather than trying to beat it.
They hold shares in the same proportions as the index and rebalance periodically. This keeps costs low and makes the holdings transparent.
The main appeal is diversification and convenience. Buying shares directly in many emerging markets can involve difficult account opening, high trading costs and local tax rules.
An ETF packages this into one trade, and the investor can start with a modest amount. There are costs and risks to understand.
The expense ratio (the annual fee charged by the fund, as a percentage of assets) is typically higher than for developed market funds, because trading in these countries costs more. Investors also face currency movements, political events and a concentration in a few large countries or companies.
Check what the fund actually holds. Some funds are heavily weighted towards a few countries or sectors, such as technology or banks.
Reading the fund fact sheet shows the top holdings, country weights, fees and how closely the fund tracks its index. Taxes can also reduce returns.
Some countries withhold tax on dividends paid to foreign investors, and the fund passes on the cost, so the income you receive may be lower than the headline yield. Your own country's tax rules on fund gains and dividends then apply on top.
In practice
Real-world examples.
Example
A teacher in her thirties invests $300 a month in an emerging market ETF within her retirement account. She plans to hold it for 25 years and accepts that its value will rise and fall sharply along the way. She uses automatic monthly purchases so that she does not try to time the market.
Example
A financial advisor suggests that a client place 10% of a $400,000 portfolio, or $40,000, in an emerging market ETF. The rest stays in developed market shares and bonds to keep the overall risk reasonable. The advisor explains that this is a long-term allocation and not a short-term trade.
Example
A small business owner with spare cash compares two emerging market ETFs. One has a lower fee, while the other is more concentrated in a single country, so she decides based on both cost and diversification. She notes the fee difference and the spread of holdings in her notes before buying.
Formula
Calculation
Annual fee = amount invested x expense ratio.
Worked example: an investor puts $50,000 into an emerging market ETF with an expense ratio of 0.60% and compares it with a developed market ETF charging 0.05%.
1. Emerging market ETF annual fee = $50,000 x 0.60% = $300
2. Developed market ETF annual fee = $50,000 x 0.05% = $25
3. Extra annual cost = $300 - $25 = $275
Over 10 years, and ignoring investment growth, the extra fee would be $275 x 10 = $2,750. The investor needs the emerging market fund to earn enough extra return to justify that cost.Case study
Seen in the real world.
Greenhaven Partners is an illustrative, fictional investment club whose members wanted exposure to emerging markets but had little experience. They considered buying shares directly in several countries but found the costs and paperwork discouraging.
The club chose a broad emerging market ETF with a fee of 0.50% and invested $60,000 in total. They agreed to hold it for at least five years, and to add money in small equal amounts every quarter rather than all at once.
During the first two years, the ETF fell in value and then recovered strongly. Because members had invested steadily and planned to hold long term, they stayed calm. The illustrative lesson is that a diversified fund plus a regular investing habit can make volatile markets easier to handle. They reviewed the holdings once a year, and used the review to check that the fund still matched its index and that the fee had not risen.
Watch out
Common mistakes.
- Assuming an emerging market ETF is as stable as a developed market fund, when the swings are usually larger.
- Ignoring the fund's country concentration, which may be dominated by one or two economies.
- Comparing funds only on past performance and overlooking fees and tracking quality.
Questions
People also ask.
What is an emerging market ETF?
It is a fund traded on an exchange that holds shares or bonds from developing economies, so one purchase gives exposure to many countries.
Is it suitable for beginners?
It can be, if the investor understands the risks and keeps it to a modest share of a diversified portfolio.
How do I choose one?
Compare the index followed, the expense ratio, the country and sector weights, the fund's size and how closely it has tracked its index.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related