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Emerging Markets Funds

 

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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:

bulletEmerging Market stocks have higher expected returns than similar non-emerging market stocks (albeit with higher risk).
 
bulletEmerging Market stocks tend to 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?

The funds are listed in rough overall order of our 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)

bulletVanguard FTSE Emerging Markets Index Fund Admiral Shares (VEMAX).  E/R: 0.15%.  This share class requires a minimum initial investment of $10,000.  This fund tracks the FTSE Emerging Index.  Note the Signal Class shares (VERSX) has the same expense ratio, but no minimum.

bulletVanguard FTSE Emerging Markets ETF (VWO).  E/R: 0.15%.  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.

bulletSchwab Emerging Markets Equity ETF (SCHE).  E/R: 0.14%.  This ETF tracks the FTSE All-Emerging Index. For more information on ETFs, see here.

bulletiShares Core MSCI Emerging Markets ETF (IEMG).  E/R: 0.18%.  This ETF tracks the MSCI Emerging Markets Investable Market index.  For more information on ETFs, see here.
 
bulletVanguard FTSE Emerging Markets Index Fund (VEIEX).  E/R: 0.33%.  This fund tracks the FTSE Emerging Index.

bulletPowerShares 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.

bulletFidelity Spartan Emerging Markets Index Fund - Fidelity Advantage Class (FPMAX).  E/R: 0.35%.  Minimum initial investment: $10,000.  This fund tracks the FTSE Emerging Index of large cap emerging markets stocks.  The fund charges a short-term redemption fee of 1.50% if you sell shares within 90 days of buying them.  This fee, paid directly to the fund, is intended to discourage market timing.  We see no good reason to buy this fund, given the availability of the less costly options above.

bulletDFA 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.

bulletPowerShares FTSE RAFI Emerging Markets Portfolio (PXH).  E/R: 0.49%.  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.
 
bulletSPDR 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.
 
bulletSPDR MSCI EM 50 ETF (EMFT).  E/R: 0.50%.  This ETF tracks the MSCI EM 50 Index of large cap emerging markets stocks.  We see no good reason to buy it, given the availability of the generally less costly and more diversified options above.  For more information on ETFs, see here.
 
bulletiShares 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.
 
bulletDow 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/EMFT) options above.  For more information on ETFs, see here.
 
bulletDFA Emerging Markets Core Equity Portfolio (DFCEX).  E/R: 0.68%.  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

bulletVanguard FTSE Emerging Markets Index Fund Admiral Shares (VEMAX).  E/R: 0.15%.  This share class requires a minimum initial investment of $10,000.  This fund tracks the FTSE Emerging Index.  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).  Note the Signal Class shares (VERSX) has the same expense ratio, but no minimum.

bulletVanguard FTSE Emerging Markets Index ETF (VWO).  E/R: 0.15%.  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).

bulletSchwab Emerging Markets Equity ETF (SCHE).  E/R: 0.14%.  This ETF tracks the FTSE All-Emerging Index. For more information on ETFs, see here.

bulletiShares Core MSCI Emerging Markets ETF (IEMG).  E/R: 0.18%.  This ETF tracks the MSCI Emerging Markets Investable Market index.  For more information on ETFs, see here.
 
bulletVanguard FTSE Emerging Markets Index Fund (VEIEX).  E/R: 0.33%.  This fund tracks the FTSE Emerging Index.  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).
 
bulletPowerShares 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.

bulletPowerShares FTSE RAFI Emerging Markets Portfolio (PXH).  E/R: 0.49%.  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.
 
bulletSPDR S&P Emerging Markets ETF (GMM).  E/R: 0.59%.  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.
 
bulletDFA 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.

bulletSPDR MSCI EM 50 ETF (EMFT).  E/R: 0.50%.  This ETF tracks the MSCI EM 50 Index of large cap emerging markets stocks.  We see no good reason to buy it, given the availability of the generally less costly and more diversified options above.  For more information on ETFs, see here.
 
bulletiShares 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.

bulletDow 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/EMFT) 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.
 
bulletFidelity Spartan Emerging Markets Index Fund - Fidelity Advantage Class (FPMAX).  E/R: 0.35%.  Minimum initial investment: $10,000.  This fund tracks the FTSE Emerging Index of large cap emerging markets stocks.  The fund charges a short-term redemption fee of 1.50% if you sell shares within 90 days of buying them.  This fee, paid directly to the fund, is intended to discourage market timing.  We see no good reason to buy this fund, given the availability of the less costly options above.

bulletDFA Emerging Markets Core Equity Portfolio (DFCEX).  E/R: 0.68%.  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 intended to serve two purposes:

bulletTo educate the public; and
bulletTo provide disclosure of Mr. Haas' opinions to prospective clients.  We believe that prospective clients are well-served by being made aware of what they are buying and what they are buying is advice that is based on these opinions.

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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