11 Ways to Invest in Emerging Markets Through ETFs and Funds

When the markets sold off in late 2018, emerging markets were hit particularly hard. But with the Fed backing off its plans for raising interest rates, and the president softening his trade rhetoric, several top investment experts and MoneyShow.com contributors are reassessing potential opportunities in emerging markets. Elliott Gue, Deep Dive Investing We recommend that investors gain exposure to emerging markets by buying units of the iShares Emerging Markets ETF . There are four basic legs to our rationale for buying this exchange-traded fund right now: #1: We're Bullish on the S&P 500 in 2019 We remain bullish on the S&P 500 in 2019. We do not believe the U.S economy is headed for recession nor do we see the S&P 500 entering a recessionary bear market. The single most important rationale for buying iShares Emerging Markets ETF here is that emerging markets tend to outperform the S&P 500 in years when the S&P 500 produces strong returns. Over the past 20 years, the ETF has outperformed the S&P 500 by an average margin of more than 16% in the eight years when the S&P 500 is up by more than 15%. #2: We're Bearish on the U.S. dollar in 2019 Emerging markets tend to outperform when the U.S. dollar is weak. Our analysis of the past 20 years of data suggests that a combination of a weaker U.S. dollar and positive market returns for the S&P 500 adds up to a powerful driver of emerging markets outperformance. Of course, the dollar was strong in 2018; that's been a headwind for the emerging markets over the past 12 months; however, we believe the U.S. dollar is more likely to fall than to rise in 2019, as U.S. economic growth appears to be slowing somewhat from a strong pace in 2018. #3: The Chinese Economy Is Likely to Gain Steam in 2019 Chinese economic growth decelerated after the middle of 2018 for a number of reasons including the threat of a trade war with the U.S. However, we believe the U.S. and China are likely to conclude a trade deal in early 2019. China accounts for more than 26% of the assets in the iShares Emerging Markets ETF, so if economic growth picks up as we expect, that will represent a sizable tailwind for EEM. #4: Emerging Markets Look Cheap on an Absolute and Relative Basis Valuations alone are never a great reason to invest in any market; however, emerging markets looked a bit expensive in late 2017 and are now looking much more reasonably valued. Another way to look at this is that emerging markets stocks were pricing in strong growth in late 2017 but expectations are more muted today, leaving scope for strong gains should growth surprise to the upside this year. George Putnam, The Turnaround Letter Sentiment toward emerging market equities is definitely depressed. Not only have the stocks been weak, but valuations were recently modest at around 11.9x for one of the major indices. We think these markets are worth a closer look. Investing directly into emerging market companies is not a familiar exercise for most investors, so we recommend investors consider diversified exchange-traded funds. Listed below are four ETFs and two closed-end mutual funds that offer investors exposure to emerging market securities. iShares MSCI Emerging Markets Often considered the go-to vehicle for emerging market equities, this $29 billion in assets ETF includes over 800 large and mid-sized companies in nearly 25 countries. Investors should be aware of the high expense ratio (0.68%) and concentration in China (31%), including Tencent at 4.4% weight. Vanguard FTSE Emerging Markets ETF Some investors prefer this over the EEM given its lower expense ratio (0.14%) and larger $74 billion (assets) size. Its performance closely matches the EEM although it holds over 4,640 stocks. Like the EEM, it has a high concentration in Chinese companies (34%), with its top-10 holdings comprising about 19% of its portfolio, including a 4% position in Tencent. SPDR S&P Emerging Asia Pacific ETF This ETF offers a way for investors to focus on China and other Asia Pacific equities. Its high 45% weight in Chinese stocks weakened its performance over the last 12 months, down 15%, yet offers the potential for sharp gains should the concerns lessen. Its highest company-specific exposure is 6.1% (Tencent Holdings), and it holds over 760 equities. Its expense ratio is a reasonable 0.49%. India Fund With $620 million in assets, the closed-end India Fund is actively managed by the respected Aberdeen Standard Investments. Like most closed-end funds, it trades at a discount (about 13.5%) to its net asset value. While its expense ratio of 1.26% is high compared to ETFs, it offers the potential to benefit from better company-specific holdings and a general return to favor of Indian companies if oil prices stay weak. Mexico Fund Founded in 1981, the Mexico Fund is one of the longest-running closed-end funds on the market. It holds a fairly concentrated portfolio of 27 Mexican equities, although it is diversified across a broad range of industries. The fund recently traded at a 13.5% discount to its net asset value, and carries a 1.62% expense ratio. iShares J.P. Morgan USD Emerging Markets Bond ETF One of the largest emerging market bond funds at nearly $15 billion, the EMB fund holds 420 government and agency bonds from dozens of countries. Most of its holdings mature in more than five years, offering higher yields (5.1%) yet also increasing its sensitivity to changing interest rates and credit quality. Its expense ratio is a reasonable 0.40%. Disclosure Note: An affiliate of the Publisher owns some of the funds discussed in this article. Bob Carlson, Retirement Watch A few months ago, we dipped back into emerging markets with DoubleLine Emerging Markets Income in our retirement paycheck portfolio. Emerging markets declined in the last half of 2017 and most of 2018. They're now at bargain levels with good margins of safety, especially the bonds. The yield is 5.83%. A big advantage of DoubleLine Emerging Markets Income is that it doesn't try to follow an index. The fund has no problem excluding entire countries and even regions if the managers have a negative view on the economies or the bond markets. It also often invests primarily in corporate bonds, avoiding risks that accompany sovereign bonds. For the last few years, the fund avoided losses related to currency fluctuations by investing only in dollar-denominated bonds. It is taking some exposure to non-dollar currencies now, because emerging market currencies declined so much the last few years that some are bargains against the dollar. Brett Owens, Contrarian Outlook I issued a sell recommendation for the Aberdeen Asia-Pacific Income Fund last May 2018 because its NAV was heading the wrong way. Rising rates were pressuring the value of the fund's fixed-rate bond portfolio, and those bonds weren't paying enough for the fund to pay its dividend without price appreciation help. Fast-forward and the financial winds have shifted. The fund's portfolio has increased in value but the shift is not yet reflected in the fund's price, which has drifted around 16% below its NAV. Aberdeen Asia-Pacific Income has paid the same $0.035 monthly dividend since 2002, which is now good for a 10.5% yield on its depressed share price. If the fund can continue paying its distribution while grinding its NAV sideways or better, it's a steal at these levels. Here's what the fund has accomplished in its storied 30-year history. It's achieved 595% total returns (including dividends) since inception; it's paid the same reliable monthly distribution since 2002, and it has delivered 7.7% annual gains on its NAV since inception. The fund tends to trade lower when there are broader China worries (such as trade wars) because Aberdeen Asia-Pacific Income has Asia in its name. I kid you not. But we're better than this, so let's look at the bonds that the fund actually holds in its portfolio; its top-10 holdings feature safe bonds issued by the national governments of Australia, and Indonesia as well as an Australian provincial government and one Chinese bank. These make up nearly one-quarter of the fund's portfolio. In fact, 68% of its holdings are investment grade. It's time for us to buy it back and start banking this 10.5% dividend as we wait for the fund's price to catch up to its rising NAV. Carl Delfeld, Cabot Emerging Markets Investor Frontier markets, which are the least developed among the emerging markets, have less developed, less liquid stock markets and normally smaller economies. Frontier markets are also completely off the radar screen of Wall Street analysts and the financial pundits. Thirty-nine of the 45 countries projected to grow 6-7% over the next five years are frontier markets. Because listed frontier market companies remain hidden to many investors, bargains abound. Frontier markets account for 25% of the world's population and 12% of the global economy but less than 3% of the market value of all companies trading on world stock markets. This gap will eventually close. And because frontier markets have been out of favor, valuations look particularly attractive. It is not easy to find the right way to capture frontier market growth. With only a few exceptions, frontier market companies do not normally trade on major U.S. exchanges. And most frontier funds are private due to the high costs of following these markets. Vietnam, with VanEck Vectors Vietnam ETF , is the only frontier market with a country ETF, and even then you must weigh its tremendous opportunities offered by its industrious, dynamic, fast-growing middle class against poor fiscal policies and the dead hand of its government. You could also invest in the iShares MSCI Argentina & Global Exporters ETF , whose holdings are predominantly Argentinian public companies. A more efficient way to invest in frontier markets is via the Templeton Frontier Markets Fund , which is up more than 7% so far this year and has exposure to countries like Argentina, Kuwait and Peru. After a rough end to 2018, it quickly vaulted above its 50-day moving average with an early-January push. Frontier markets are not for the faint-hearted, but adding even a little exposure could add some high-reward punch to your portfolio.

11 Ways to Invest in Emerging Markets Through ETFs and Funds

These expert picks offer exposure to the many potential opportunities in emerging markets.

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