Emerging markets ETFs - Which perform best in January 2024? | Finder UK (2024)

Emerging markets have been a somewhat unloved sector over the last decade, but the world is changing and this could benefit these regions. Overall, emerging economies account for 50% of global GDP and 66% of global GDP growth in the last 10 years. One of the best ways to capitalise on possible future growth in these areas is by investing in an emerging market exchange-traded fund (ETF).

Best emerging markets ETFs in the UK

No one can predict the future, so it’s impossible to say what will be the best emerging markets ETF in the coming years. However, we can gain some useful insights from the past, and below are the best-performing emerging markets ETFs from recent years.

Table: sorted by 5-year performance based on data from JustETF.com to 10 January 2024

Icon	Fund	5-year performance	YTD performance (to 10 January 2024)	Link to invest
	SPDR MSCI Emerging Markets Small Cap UCITS ETF (EMSM)	51.74	-1.31%	Invest with Hargreaves LansdownCapital at risk
	iShares MSCI Emerging Markets Small Cap UCITS ETF (IEMS)	51.37%	-1.48%	Invest with IGCapital at risk
	Xtrackers MSCI GCC Select Swap UCITS ETF 1C (XGLF)	46.51%	1.75%	Invest with IGCapital at risk
	Xtrackers MSCI Emerging Markets ESG Screened UCITS ETF 1C (XDEX)	43.05%	-3.39%	Invest with IGCapital at risk
	WisdomTree Emerging Markets SmallCap Dividend UCITS ETF (DGSE)	38.86%	-4.73%	Invest with InvestEngineCapital at risk

What are emerging markets ETFs?

This is simply an ETF that tracks either a single or multiple emerging markets. In a similar way that you can use ETFs to invest in developed economies like the UK and the US, emerging market ETFs allow you to invest in the potential growth of these regions.

Although there’s no dictionary definition for an emerging market, it tends to refer to the 24 countries that make up the MSCI Emerging Market Index. This includes countries such as:

• Brazil
• China
• India
• Mexico
• Thailand
• South Korea

How emerging markets ETFs work

They work in a very similar way to other ETFs. There are several emerging market ETFs offered by various investment companies that passively track the overall MSCI Emerging Markets Index, providing wide exposure.

There will also be emerging markets ETFs that focus on specific regions like Latin America, Asia or the Middle East. And there will also be country-specific emerging market ETFs that concentrate on a single country, like China, for example.

You may also come across actively managed emerging markets ETFs, where fund managers will hand-pick investments, but these tend to come with higher fees.

How to invest in emerging markets ETFs

Investing in emerging markets with an ETF can be extremely straightforward and not much different than you’d otherwise invest in ETFs. Here’s a step-by-step guide to explain:

1. Research emerging markets ETFs. Not all platforms will have the emerging market ETF you want in stock (excuse the pun). Once you know the best emerging market ETF you want to buy, this can help narrow down investing platforms.
2. Open a share dealing account. After finding your ideal investing platform, you’ll need basic personal details to hand when you open your trading account. It’s best to have some ID ready along with your national insurance (NI) number.
3. Fund your account. Once you’ve picked a platform and opened an account, the next step is to deposit funds. Most will allow this via bank transfer or debit card.
4. Choose how much you want to invest. With an investment account set up, and funds deposited, you’re ready to choose the amount you want to invest in an emerging market ETF. You can also set up regular monthly investments with most platforms.
5. Buy the emerging market ETF. Create an order to buy your ETF. It’s as simple as that.

Are emerging markets ETFs a good investment?

Emerging markets as a whole segment have had a tough time in the last decade. For example, the MSCI Emerging Markets index is down by around 5% in the past 5 years, and is at roughly the same level it was in 2006.

A big part of this poor performance was to do with the global financial crash in 2008 and then emerging markets struggled to recover as low interest rates and accelerating tech companies created ideal conditions for developed regions to swell.

However, the situation we find ourselves in now is very different to the past decade. Emerging markets are growing rapidly, have a fast-growing middle class population and the economies are benefiting from shifting global trade relationships and supply chains.

The risks of investing in emerging markets ETFs

Although emerging markets present some interesting investment opportunities, these regions tend to come with unique challenges that investors should be aware of:

• What happens in the US, and with the US dollar, still has a reverberating impact in emerging markets.
• Some emerging markets struggle with profitability and efficiency.
• There can be internal and external political risks that impact emerging market ETFs.
• ETFs tracking the main emerging markets index have performed poorly in recent years.
• Active management rather than a passive ETF might be a better option but this means higher costs.
• Emerging market ETFs tend to come with higher fees.
• Not all investing platforms will offer emerging market ETFs.
• These ETFs can be more volatile than other options.

Pros and cons of emerging markets ETFs

Bottom line

Developing countries are a complex place to invest, but using emerging markets ETFs can be one of the best ways to get exposure to these regions with a simple and cheap investment. It’s hard to predict which emerging market will fare the best in the coming decades, but an ETF allows you to invest in specific regions or all 24 countries.

Emerging markets have underperformed in recent years, but the world is changing. What’s been the best investment in the past won’t necessarily be the best moving forward. Using an emerging market ETF can be an excellent way to add another dimension of diversification to your portfolio. Just be aware that some of these markets come with unique challenges and tend to be more volatile.

FAQs

• According to the MSCI Emerging Markets Index, there are 24 countries that currently meet the criteria to be considered an emerging market for investment purposes.

• These investments work the same way as any other ETF, however, emerging markets can be a more advanced area of investing compared to developed markets like the US and the UK. Emerging market ETFs may not be the best investment for beginners, yet they could be worth using to get some exposure if you want a globally diversified portfolio.

• Some will, it depends on the companies held within each ETF. For example, if you were to invest in the iShares Core MSCI EM IMI UCITS ETF, this has a current dividend yield of 3.86%. However, there will also be plenty of emerging market ETFs that don't pay dividends, so always check this first if you want an ETF that pays dividend income.