Investing in Emerging Markets with ETFs: What to Know

Investors are showing strong interest in India’s growth potential. In the market for offshore funds, India-focused equity funds have brought in US$ 1.7 billion just this quarter, with new investments in this category totalling US$ 2.6 billion.

Even though emerging markets contribute significantly to the global economy, many investors still don’t include them enough in their portfolios. These markets have come a long way, shifting from relying on cheap labour and raw materials to focusing on technology and efficiency for growth.

A smart approach to investing is finding areas that are likely to multiply. Whether it’s in stocks, real estate, or gold, if you expect prices to rise, you’ll want to invest early and hold on for a while. Emerging markets, in particular, offer great chances for high returns.

There isn’t a single strategy that works for all emerging markets. That’s why we offer a variety of affordable, single-country ETFs. These options let investors customize their portfolios to match their goals, making it easier to seize the opportunities available in different markets.

Key Considerations Before Investing in Emerging Market Funds in India

Investing in emerging market funds in India can be highly rewarding, but it’s important to keep a few essential factors in mind:

Potential Risks and Rewards

Emerging market funds can offer significant growth, but they come with various risks:

• Inflation Concerns: Rapid economic growth in countries like India can lead to higher inflation, which may reduce the purchasing power of your returns.
• Currency Fluctuations: The Indian Rupee’s value can be unpredictable compared to the US Dollar, leading to potential swings in your investment returns.
• Liquidity Challenges: Emerging markets often have lower trading volumes, making it harder to quickly sell your investments if necessary.
• Regulatory Uncertainty: Evolving regulations in emerging markets can make it difficult for fund managers to make fully informed investment decisions.
• Political Instability: Political uncertainty is more common in developing economies, which can negatively impact market performance.

While these risks are present, the growth potential in emerging markets can make them attractive investment options. Just be sure to carefully consider the risks involved.

Cost of Investment

The expense ratio is the fee charged by the fund provider for managing the fund, calculated as a percentage of the fund’s total assets. Opting for a fund with a lower expense ratio is important because it allows you to keep more of your investment gains. Always seek out funds with competitive expense ratios to maximize your returns.

Top Emerging Market ETFs for Investors

Here are five top ETFs for investors looking to gain exposure to emerging markets, with a focus on different regions and sectors:

1. iShares Core MSCI EM IMI UCITS ETF (EIMI)

For those seeking broad exposure to emerging markets, the iShares Core MSCI EM IMI UCITS ETF (EIMI) is a solid choice. As Europe’s largest ETF in this asset class, with $17.4 billion under management, it carries a low total expense ratio (TER) of 0.18%. EIMI tracks the MSCI Emerging Markets Investable Market Index, which includes 3,110 securities from 24 emerging market countries.

Key holdings include:

• Taiwan Semiconductor
• Tencent
• Samsung Electronics
• Alibaba
• Reliance Industries

China, India, and South Korea are the top-weighted countries in the fund, reflecting their economic importance.

2. Lyxor MSCI Emerging Markets Ex China UCITS ETF (EMXC)

The Lyxor MSCI Emerging Markets Ex China UCITS ETF (EMXC) is ideal for investors who want broad emerging market exposure while managing their China allocation separately. This ETF, with $342 million in assets, tracks the MSCI Emerging Markets ex China Net Return Index, covering 662 stocks. It offers significant exposure to Taiwan, India, and South Korea.

Over the past decade, this index has delivered slightly better returns than the broader MSCI Emerging Markets Index.

3. KraneShares CSI China Internet UCITS ETF (KWEB)

With China’s rapid rise as a technological superpower, the KraneShares CSI China Internet UCITS ETF (KWEB) focuses on the booming tech sector. This $378 million fund tracks the CSI Overseas China Internet Index, which includes around 30 overseas-listed Chinese internet companies such as Baidu, JD.com, Tencent, and Alibaba. KWEB is a great option for those looking to invest in China’s tech revolution.

4. SPDR Bloomberg Emerging Markets Local Bond UCITS ETF (EMLD)

The SPDR Bloomberg Emerging Markets Local Bond UCITS ETF (EMLD) benefits from the weakening US dollar, offering exposure to 503 local-currency emerging market bonds. With $2.6 billion in assets, this ETF tracks the Bloomberg EM Local Currency Liquid Government Bond Index and has a TER of 0.55%. Countries like South Korea, Indonesia, China, Malaysia, and Mexico are the top contributors, with the ETF currently yielding 4.9%.

5. Franklin FTSE India UCITS ETF (FLXI)

India’s growing economic significance makes the Franklin FTSE India UCITS ETF (FLXI) a compelling choice for investors. This $229 million ETF is the only one in Europe to track a FTSE Russell index, specifically the FTSE India 30/18 Capped Index. With a low fee of 0.19%, FLXI offers exposure to 209 Indian companies, with a focus on sectors like financials, technology, industrials, energy, and consumer discretionary.

These ETFs offer diverse ways to invest in fast-growing and dynamic emerging markets, catering to different investment strategies and regional focuses.

Conclusion: Strategic Exposure to Emerging Markets

Investing in emerging market ETFs offers a unique opportunity to tap into the growth potential of rapidly developing economies. Whether you’re seeking broad exposure across multiple countries, focusing on specific regions like India or China, or diversifying into local currency bonds, there are tailored options available.

Each of these ETFs provides a different angle on the emerging markets story, allowing investors to align their portfolios with their specific investment goals. By carefully selecting the right ETF, investors can position themselves to benefit from the dynamic growth and innovation driving these economies forward.