Emerging Markets Funds

Altruist Financial Advisors LLC
Fee-Only Financial Planning and Portfolio Management

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).
	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: 0.22%. This ETF is a share class of VEIEX below. This fund's extremely low expense ratio suggests it demands strong consideration here. For more information on ETFs, see here. Our preference for VWO over SCHE is small.
	Schwab Emerging Markets Equity ETF (SCHE). E/R: 0.25%. This ETF tracks the FTSE All-Emerging Index. For more information on ETFs, see here.
	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.
	Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX). E/R: 0.22%. This share class requires a minimum initial investment of $10,000. This fund tracks the MSCI Emerging Markets Free Index. It has a 0.50% 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 funds primarily because of its excessive purchase/redemption fees.
	Fidelity Spartan Emerging Markets Index Fund (FPEMX). E/R: 0.46%. This fund tracks the FTSE Emerging Index of large cap emerging markets stocks. We see no good reason to buy this fund, given the availability of the less costly options above. There is also a lower-cost share class (FPMAX), which has an expense ratio of 0.35%, but a minimum initial investment of $100,000.
	DFA Emerging Markets Portfolio (DFEMX). E/R: 0.61%. 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.
	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.
	Vanguard Emerging Markets Stock Index Fund (VEIEX). E/R: 0.35%. This fund tracks the MSCI Emerging Markets Free Index. It has a 0.50% 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 funds primarily because of its excessive purchase/redemption fees.
	iShares MSCI Emerging Markets Index Fund (EEM). E/R: 0.69%. 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.
	Dow Jones Emerging Markets CompositeTitans Index ETF (EEG). E/R: 0.75%. This ETF tracks the Dow Jones Emerging Markets Titans Composite Index of large cap emerging markets stocks. We see no good reason to buy it in retirement accounts, given the availability of less costly (and more diversified, except for ADRE) options above. For more information on ETFs, see here.
	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.
	DFA Emerging Markets Core Equity Portfolio (DFCEX). E/R: 0.65%. 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).

Taxable Accounts

	Vanguard Emerging Markets ETF (VWO). E/R: 0.22%. This ETF is a share class of VEIEX below. 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 1998-2009). Our preference for VWO over SCHE is small.
	Schwab Emerging Markets Equity ETF (SCHE). E/R: 0.25%. This ETF tracks the FTSE All-Emerging Index. For more information on ETFs, see here.
	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.
	Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX). E/R: 0.22%. This share class requires a minimum initial investment of $10,000. This fund tracks the MSCI Emerging Markets Free Index. It has a 0.50% 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 1998-2009). This fund is rated lower than the above funds primarily because of its excessive purchase/redemption fees.
	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: 0.61%. 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.
	Vanguard Emerging Markets Stock Index Fund (VEIEX). E/R: 0.35%. This fund tracks the MSCI Emerging Markets Free Index. It has a 0.5% 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 1998-2009).
	iShares MSCI Emerging Markets Index Fund (EEM). E/R: 0.69%. 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.
	Dow Jones Emerging Markets CompositeTitans Index ETF (EEG). E/R: 0.75%. This ETF tracks the Dow Jones Emerging Markets Titans Composite Index of large cap emerging markets stocks. We see no good reason to buy it, given the availability of less costly (and more diversified, except for ADRE) options above. 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.
	Fidelity Spartan Emerging Markets Index Fund (FPEMX). E/R: 0.46%. This fund tracks the FTSE Emerging Index of large cap emerging markets stocks. We see no good reason to buy this fund, given the availability of the less costly options above. There is also a lower-cost share class (FPMAX), which has an expense ratio of 0.35%, but a minimum initial investment of $100,000.
	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: 0.67%. 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.

This web page contains the current opinions of Eric E. Haas at the time it is written — and such opinions are subject to change without notice. This web page is for educational purposes only — we believe the information provided here to be useful and accurate at the time it is written. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed.

No investor should invest solely on the basis of information listed here. Before investing, it is important to consult each prospective investment's prospectus and consider both its risk/return characteristics and its effect on your overall portfolio.

This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Altruist recommends consultation with a qualified tax adviser, CPA, financial planner, or investment adviser. If you would like to discuss the rationale or support for any particular idea expressed on this web page, feel free to contact us.

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