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There are at least two good reasons why most investors should consider
investing a portion of
their portfolios in emerging market stocks:
 | Emerging Market stocks have higher expected returns than similar non-emerging
market stocks (albeit with higher risk).
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| Emerging Market stocks have relatively low correlations with other asset
classes,
so including them in a portfolio should improve the
portfolio's risk/return characteristics. |
For more information on Emerging Markets, see
here.
There are several similar-seeming investment options
available. Which is best?
All of the options discussed here will likely have somewhat similar
performance and any of them will probably get the job done quite well. You
can't go far wrong choosing any of the options listed here. The funds are listed in rough overall
order of preference.
Preferences are listed separately for use in
retirement accounts and for taxable accounts.
For a listing of our preferences in other asset classes, see
here.
Retirement Accounts (i.e., tax-deferred or tax-exempt accounts)
| Vanguard Emerging Markets ETF (VWO). E/R: 0.25%. This
ETF is a share class of VEIEX below. As such, it should benefit from greater internal efficiency
that incoming cash flows bring, as compared with other ETFs. This fund's
extremely low expense ratio suggests it demands strong consideration here. For
more information on ETFs, see here.
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| PowerShares BLDRS Emerging Markets 50 ADR Index Fund (ADRE). E/R:
0.30%. This ETF tracks an index of large emerging markets stocks which
happen to have ADRs (American Depositary Receipts) trading on US exchanges.
While the fund has a very low expense ratio, it isn't very well diversified. For more information on
ETFs, see here.
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| DFA Emerging Markets Portfolio (DFEMX). E/R: 0.60%. This
fund invests in large-cap stocks (i.e., top 40% to 90% of market
capitalization) of 16 emerging market countries. Target country
allocations are approximately capitalization weighted in accordance with free
float market capitalizations, subject to a buying ceiling.
The buying ceiling should reduce the fund's exposure to political risk. Rebalancing is only done with new money to minimize transaction fees.
We see no good reason to buy this fund, given the availability of the less
costly options above.
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| SPDR S&P Emerging Markets ETF (GMM). E/R: 0.60%. This
ETF tracks the S&P/Citigroup BMI Emerging Markets Index. We see no good reason to buy it, given the availability of the less costly options above. For more information on ETFs,
see here.
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| Vanguard Emerging Markets Stock Index Fund (VEIEX). E/R: 0.37%. This
fund tracks the MSCI Emerging Markets Free Index. It has a 0.25%
purchase fee and a 0.25% redemption fee, both payable to the fund, to cover the
costs of deploying new cash and to discourage short-term trading,
respectively. This fund is rated lower than the above two funds solely
because of its excessive purchase/redemption fees.
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| iShares MSCI Emerging Markets Index Fund (EEM). E/R: 0.75%. This
ETF tracks the MSCI EMF index. We see no good reason to buy it in
retirement accounts, given the availability of less costly options above. For more information on ETFs,
see here.
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| PowerShares FTSE RAFI Emerging Markets Portfolio (PXH). E/R: 0.85%. This
ETF tracks the FTSE RAFI Emerging Index, designed to track the largest
emerging markets stocks, as measured by four fundamental measures of firm
value: firm size: book value, cash flow, sales and dividends. We see no good reason to buy it in
retirement accounts, given the availability of the less costly options above. For more information on ETFs,
see here.
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| DFA Emerging Markets Core Equity Portfolio (DFCEX). E/R: 0.74%. This
interesting fund invests in a diversified mix of stocks in 15 emerging market
countries. It has a distinct small and value tilt. This fund is
designed to behave roughly as though it were 50% in an Emerging Markets Large
Cap fund, 25% in an Emerging Markets Value fund, and 25% in an Emerging
Markets Small Cap fund. However, this is NOT a fund of funds (so it is
eligible for the foreign tax credit when held in taxable accounts). We
are not very enthusiastic about this fund because it isn't style-pure (i.e.,
it's not large-cap, it's not small-cap, it's not value -- it is a combination
of all of them -- and a combination like this is difficult to fit into an
asset allocation). |
| Vanguard Emerging Markets ETF (VWO). E/R: 0.25%. This ETF
is a share class of VEIEX below. As such, it should benefit from greater internal efficiency
that incoming cash flows bring, as compared with other ETFs. This fund's extremely low expense ratio suggests it demands strong consideration here. For more information on ETFs,
see here. While ETFs tend to be more tax efficient
than conventional mutual funds, Vanguard ETFs are an exception — this ETF will be merely as tax efficient as VEIEX
(no more, no less), but with a lower expense ratio. The fact that VEIEX
has an ETF share class should make it somewhat more tax-efficient than it
otherwise would be. Even without the ETF share class, VEIEX has been
quite capital gains tax-efficient (no capital gains distributions at all at
least from 1998-2007).
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| PowerShares BLDRS Emerging Markets 50 ADR Index Fund (ADRE). E/R:
0.30%. This ETF tracks an index of large emerging markets stocks which
happen to have ADRs (American Depositary Receipts) trading on US exchanges.
While the fund has a very low expense ratio, it isn't very well diversified. For more information on ETFs,
see here. As an ETF, this fund is expected to be
perfectly (capital gains) tax-efficient, unlike most non-ETFs.
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| SPDR S&P Emerging Markets ETF (GMM). E/R: 0.60%. This
ETF tracks the S&P/Citigroup BMI Emerging Markets Index. We see no good reason to buy it, given the availability of
the less costly options above. For more information on ETFs,
see here.
|
| DFA Emerging Markets Portfolio (DFEMX). E/R: 0.60%. This
fund invests in large-cap stocks (i.e., top 40% to 90% of market
capitalization) of 16 emerging market countries. Target country
allocations are approximately capitalization weighted in accordance with free
float market capitalizations, subject to a buying ceiling. The buying
ceiling should reduce the fund's exposure to political risk. Rebalancing
is only done with new money to minimize transaction fees. This fund has had zero capital gains distributions since the fund's inception
(in 1994) through 2005. It had a modest long-term capital gains
distribution of 0.6% in 2006.
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| Vanguard Emerging Markets Stock Index Fund (VEIEX). E/R: 0.37%. This
fund tracks the MSCI Emerging Markets Free Index. It has a 0.25% purchase fee and a
0.25% redemption fee, both payable to the fund, to cover the costs of deploying
new cash and to discourage short-term trading, respectively. The fact
that this fund has an ETF share class should make it somewhat more
tax-efficient than it otherwise would be. Even without the ETF share
class, this fund has been quite capital gains tax-efficient (no capital gains
distributions at all at least from 1998-2006). This fund was listed lower than DFEMX because its purchase and
redemption fees limit what otherwise might be beneficial tax-loss harvesting
opportunities.
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| iShares MSCI Emerging Markets Index Fund (EEM). E/R: 0.75%. This
ETF tracks the MSCI EMF index. For more information on ETFs,
see here. As an ETF, this fund is expected to be
perfectly (capital gains) tax-efficient, unlike most non-ETFs.
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| PowerShares FTSE RAFI Emerging Markets Portfolio (PXH). E/R: 0.85%. This
ETF tracks the FTSE RAFI Emerging Index, designed to track the largest
emerging markets stocks, as measured by four fundamental measures of firm
value: firm size: book value, cash flow, sales and dividends. For more
information on ETFs, see here. As an ETF, this
fund is expected to be perfectly (capital gains) tax-efficient, unlike most
non-ETFs.
|
| DFA Emerging Markets Core Equity Portfolio (DFCEX). E/R: 0.74%. This
interesting fund invests in a diversified mix of stocks in 15 emerging market
countries. It has a distinct small and value tilt. This fund is
designed to behave roughly as though it were 50% in an Emerging Markets Large
Cap fund, 25% in an Emerging Markets Value fund, and 25% in an Emerging
Markets Small Cap fund. However, this is NOT a fund of funds (so it is
eligible for the foreign tax credit when held in taxable accounts). We
are not very enthusiastic about this fund because it isn't style-pure (i.e.,
it's not large-cap, it's not small-cap, it's not value -- it is a combination
of all of them -- and a combination like this is difficult to fit into an
asset allocation). Further, this fund is not expected to be particularly
tax efficient. |
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