Should You Add Emerging Market ETFs to Your Portfolio Now?

An increasingly complex geopolitical landscape reinforces the importance of spreading risks across sectors, asset classes and regions, making emerging market funds a potential tool for portfolio diversification.

The Dow Jones Emerging Markets Index has gained 2.05% so far in August, adding 16.64% over the past year and 10.18% year to date.

Improving Flows Signal Renewed Interest

Per LSEG Lipper data, as quoted on Reuters, emerging market equity funds recorded $3.45 billion in net inflows for the week ended Aug. 12, marking the fifth consecutive week of positive flows. This adds to the positive investment flows into the emerging markets in July, when fund flows turned positive after two months of outflows as the broader equity exodus eased significantly.

As quoted in another Reuters article, emerging market portfolios attracted nearly $19 billion in foreign investment in July, according to data from a banking trade group. The improvement in fund flows could signal a shift in investor sentiment and suggest that momentum in emerging market funds is beginning to build, potentially making the asset class increasingly attractive for investors seeking to add international exposure.

Dollar Weakness Boosts Emerging Market Appeal

A weaker U.S. dollar can also support the demand for emerging market equity funds. As headwinds facing U.S. markets increase, investors may look beyond the domestic market for investment opportunities, potentially reducing the demand for U.S. securities and, in turn, putting downward pressure on the greenback. A weaker dollar can improve the relative appeal of emerging market assets and provide an additional tailwind for the international equity markets.

According to TradingView, the U.S. Dollar Index has fallen 0.28% over the last trading session and 1.43% over the past month. The index has also recorded an all-time decline of 17.12%.

Here’s Why Emerging Market ETFs Could Be Worth Considering

Investors seeking greater geographic diversification and looking to reduce their reliance on U.S. securities could consider emerging market ETFs. These funds offer an efficient way to achieve broader geographic diversification. While emerging markets come with higher volatility and risks, a measured allocation can help broaden geographic exposure and strengthen overall portfolio diversification.

Investors should maintain a long-term investment horizon when investing in emerging market funds, as their higher volatility can lead to short-term fluctuations. Over the longer term, exposure to emerging markets could enhance a portfolio’s return potential.

However, emerging market funds should represent only one component of a broader geographic diversification strategy. Their higher risk profile makes it important for investors to consider their individual risk tolerance and investment objectives when determining an appropriate allocation.

Emerging market ETFs should be complemented with broadly diversified global equity funds, which provide exposure to a wider range of economies and can help create a more balanced global portfolio.

Emerging Market ETFs Worth a Look

Below, we have highlighted some funds that investors can use to gain exposure to emerging market economies.

All the funds mentioned below have broadly similar sector and geographic allocations.

Each fund has double-digit exposure to the technology and the financial sectors, with technology commanding the larger share. On average, technology accounts for around 36% of the portfolios compared with roughly 20% for financials, highlighting the funds’ significant reliance on the tech sector while maintaining meaningful exposure to financial stocks.

Geographically, the funds also have similar allocations, with Taiwan, China and India each representing double-digit weights across the funds. Avantis Emerging Markets Equity ETF (AVEM), iShares MSCI Emerging Markets ETF (EEM) and iShares Core MSCI Emerging Markets ETF (IEMG)also have double-digit exposure to South Korea, increasing their concentration in the key Asian emerging markets.

Performance trends are similarly aligned. The funds have posted gains over the past year and year to date, but have declined over the past month and since the start of the week. Schwab Emerging Markets Equity ETF (SCHE) is the only exception, having gained 0.67% over the past month.

iShares Core MSCI Emerging Markets ETF IEMG

IEMG seeks to track the performance of the MSCI Emerging Markets Investable Market Index with a basket of 2,861 securities. The fund charges an annual fee of 0.09% and has a dividend yield of 2.26%.

IEMG has amassed an asset base of $158.59 billion and has a one-month average trading volume of 11.49 million shares.

Vanguard FTSE Emerging Markets ETF VWO

VWO seeks to track the performance of the FTSE Emerging Markets All Cap China A Inclusion Index with a basket of 6,338 securities. The fund charges an annual fee of 0.06% and has a dividend yield of 2.29%.

VWO has amassed an asset base of $126.03 billion and has a one-month average trading volume of 7.42 million shares.

iShares MSCI Emerging Markets ETF EEM

EEM seeks to track the performance of the MSCI Emerging Markets Index with a basket of 1,197 securities. The fund charges an annual fee of 0.72% and has a dividend yield of 1.65%.

EEM has amassed an asset base of $30.4 billion and has a one-month average trading volume of 22.96 million shares.

Avantis Emerging Markets Equity ETF AVEM

AVEM employs an active strategy, seeking long-term capital appreciation by investing primarily in companies across emerging markets with a basket of 3,953 securities. The fund charges an annual fee of 0.33% and has a dividend yield of 1.86%.

AVEM has amassed an asset base of $27.22 billion and has a one-month average trading volume of 1.87 million shares.

State Street SPDR Portfolio Emerging Markets ETF SPEM

SPEM seeks to track the performance of the S&P Emerging BMI Index with a basket of 2,979 securities. The fund charges an annual fee of 0.07% and has a dividend yield of 2.48%.

SPEM has amassed an asset base of $17.61 billion and has a one-month average trading volume of 2.05 million shares.

Schwab Emerging Markets Equity ETF SCHE

SCHE seeks to track the performance of the FTSE Emerging Index with a basket of 2,224 securities. The fund charges an annual fee of 0.07% and has a dividend yield of 2.58%.

SCHE has amassed an asset base of $12.83 billion and has a one-month average trading volume of 3.17 million shares.

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