A diversified investment portfolio is critical to protect you against abrupt market fluctuations & portfolio crashes. However, you don’t necessarily need to stay stuck to the “Sector-Wise” diversification as an informed investor. You can invest in multiple industries & opt for asset-class diversification.
Investing in a geographically diverse portfolio can be exceptionally profitable while granting you access to significant growth opportunities. If you are a Canadian investor looking for profit-churning investments, you can give a thought to the best emerging market ETFs in Canada. The year 2020 had been tough for us all. However, this led investors to think bigger and invest in an emerging market instead of the saturated & mature Canadian market.
Although the ETFs in Canada aren’t as versatile, the demand is now more than ever. So, let us check out the following;
Top 5 emerging market ETFs in Canada
for the year 2021.
|
ETFs |
Fees |
Ticker |
Dividend Yield (12 Months) |
MER |
Assets Under Management |
Focus Regions |
|
iShares by BlackRock |
0.25 percent |
XEC |
1.56% |
0.27% |
$1.5 Billion |
East Asia |
|
Vanguard FTSE ETF |
0.23 percent |
VEE |
1.65% |
0.24% |
$1.6 Billion |
India, East Asia, & Brazil |
|
RBC Royal Bank Quant ETF |
0.64 percent |
RXD |
2.26% |
0.72% |
$47.8 Million |
India & East Asia |
|
BMO MSCI ETF |
0.25 percent |
ZEM |
2.04% |
0.27% |
$2.1 Billion |
India & East Asia |
|
Mackenzie Investments ETF |
0.50 percent |
MEE |
0.96% |
0.57% |
$202 Million |
India & East Asia |
1-iShares Core MSCI IMI Index ETF:
A top-rank holder in this list of best ETFs for 2021, iShares comprises equities instead of bonds (a practice seen with several ETFs in the emerging market). Brought to you by BlackRock, it has about 2477 underlying stock holdings. The prime holding with this ETF is a segment of the US ETFs that flaunt $55 Billion in net assets under management.
The most significant equities in this ETF include names such as:
- Alibaba
- Taiwan Semiconductor Manufacturing Company
- Tencent
- Samsung Electronics
Together, these four companies comprise 21 percent of the cumulative weightage. Moreover, the geographical distribution for these ETFs leans majorly towards Taiwan and China making up about 52 percent of the entire fund. This pattern could be seen among most top-ranking ETFs in the emerging market.
South Korea & India are among the 3rd & 4th most notable regions. On the other hand, the distribution of the sector-wise holding is relatively even, with IT, consumer discretionary, financials, & communications picking the lead positions.
The prime reason for this ETF to top the charts is that it offers a decent yield and capital growth. The 5-year CAGR for this stock is nearly 7.76 percent. However, the only downside to this particular ETF is its bi-yearly distribution. M
2-Vanguard FTSE ALL Cap Index ETF:
Vanguard is the 2nd largest company in terms of investment management globally. About 75 percent of the total share is taken up by four countries that include:
- China- 43.8 percent
- Taiwan- 16.2 percent
- India- 9.5 percent
- Brazil- 6.2 percent
On the other hand, this ETFs sector-wise distribution is a tad different. First, financials take the lead, followed by technology and consumer services. However, the three most sizeable holdings are similar to iShares, including Taiwan Semiconductors, Tencent, & Alibaba, with 5000+ holdings in total.
This ETF also has considerable potential for substantial capital growth. After dividend adjustments, the ETF’s 5-year CAGR is about 7.3 percent. Moreover, the fund has also shown a remarkable recovery post the crash driven by the pandemic. Currently, it is trading at a mere 1.7 percent below the pre-pandemic high.
This shows how resilient ETFs can be regardless of the market situation. Moreover, it pays up quarterly dividends to its holders. Finally, the MER and fee are low to ensure they don’t shift the bottom line by a considerable margin unless you are investing a massive amount.
3-RBC Royal Bank Quant ETF:
Compiled by the RBC or the Royal Bank of Canada, this popular ETF might deter you from investing, given its high fees. However, the high fees are sure worth the investment given that it pays its investors monthly dividends along with a high yield. Its 5-year growth rate might not be as fancy compared to our top choices, but it is still high enough.
The ETF’s funds are focused on Taiwan, China, India, & South Korea. These four emerging markets take up about 71 percent of the entire fund. This is the first of its kind fund with a manageable holding size of 177. This is mainly because the ETF was created keeping dividends for the investors in mind. As a result, most of its underlying holdings tend to pay regular dividends.
It could also be the prime reason for its fees being so high. The process of synchronizing several dividends on a monthly, quarterly, or yearly basis to pay up the investors requires comprehensive planning. Although its prime holdings don’t count Alibaba in the portfolio, it does have Samsung, Tencent, & Taiwan Semiconductor as a significant part of the holding. Together, they make up 19 percent of the ETF’s weight. This ETF falls under a medium-high risk portfolio.
4-BMO MSCI ETF:
Another popular emerging market ETF comes from the popular Bank of Montreal. It is among the fast-growing ETFs in our compilation & also the oldest, striking an annual 8.67% growth rate. The only catch with this ETF is that it distributes the earnings annually. This makes it less appealing for dividend investors. Finally, BMO MSCI ETF tracks the cumulative progress of 26 different emerging markets. However, a significant chunk of its overall weightage is comprised of Taiwan, China, India, & South Korea.
Compared to others in this list, its shareholdings are slightly different. That being said, a bulk of its holdings are with another ETF, the iShares MSCI ETF by BlackRock. This holding is about 11.31 percent of the total fund. The following top 5 holdings are the same as iShares making up about 33.3 percent of its portfolio. The ETF has a cumulative holding of 866.
5-Mackenzie Investments ETF:
Last but not least, the Mackenzie Investments ETF has a mixed portfolio compared to others on the list. The ETF’s regional distribution is slightly different. China makes up for 25.4 percent of the fund’s weightage, followed by India with a whopping 19.6 percent weightage, and Taiwan with 13.5 percent weightage.
Apart from this, the ETF’s sector-wise fund distribution is a varied one as well. Healthcare is in the lead, followed by IT. Moreover, the ETF is pretty young, created about three years ago. The top 5 holdings that make up this fund include:
- Taiwan Semiconductor
- NIO Inc- China
- Gold Fields Limited- South Africa
- AngloGold Ashanti- South Africa
- Li Ning
Given that it is a young ETF, we are yet to see its long-term progress. Although this ETF isn’t as popular as BlackRock, the investment comprises names that have been known for 50+ years in the market, with more than $141 Billion of assets being managed by it.
Frequently Asked Questions
1-Why Should I Invest In An Emerging Market ETF Canada?
With the help of an emerging market ETF Canada, you get access to portfolio diversification. It helps spread the risk while adding stock baskets to your investment portfolio from different countries. This helps mitigate the uncertainty that stems from investing in a less-developed market.
2-How Can You Buy Emerging Market ETFs in Canada?
If you plan on investing in the emerging market ETFs in Canada, you can purchase them through various methods and online sources. However, the easiest, cheapest, and most sought-out way is to contact a renowned discount broker. Learn more about how to buy ETFs in Canada.
3-Is There A Fee To Sell the ETF Shares?
If you plan on selling your ETF shares at some point, you might have to pay a small amount as fees depending on the broker you have selected.
4-What Is An Emerging Market ETF?
Emerging market ETFs are exchange-traded funds invested in the stock portfolio of economies part of the emerging market. Investing in ETFs adds immense diversity to your investment portfolio that doesn’t massively correlate to the U.S-based equities.
5-How Much of Your Portfolio Should You Allocate for the ETFs?
If you plan on investing in emerging market ETFs, it is suggested that you allocate about 13 to 39 percent of your total fund to the same.
Conclusion
If you haven’t yet diversified your portfolio, the time is now! Adding the best ETF to your portfolio in Canada would give you access to geographic diversification while introducing unprecedented growth for your portfolio. In addition, several emerging markets, such as China, recovered substantially post-pandemic. So, even if your existing local portfolio hasn’t been productive in the past few years, you can profit from a diversified stake in the emerging markets.
Also Read:
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Last week, we reported that Fidelity Investments Canada would launch a Canadian ETF business. As I explained in my previous blog in the Financial Post this morning, the company’s actively managed balanced ETF portfolio will expand in Canada. ETF shares began trading on the Toronto Stock Exchange (TSX: TSE), Canada’s largest stock exchange. At the opening bell ceremony at the exchange, John D’Agostino, F fidelity’s CEO and Chief Investment Officer for Canada, said that the addition of an actively managed balanced ETF complements the first set of ETFs his company is launching, TSPDX (see G & M story “Fidelity to launch CanadianETF business “below). As of May last year, the ETF’s shares would be trading at $1.00 per share, compared with $0.05.
This may not be the case in the future, but the ETF, which holds more than 5,000 shares, aims to track the performance of the MSCI Emerging Markets IMI Index (the “Index”) and focuses on stocks in the index, including those from Brazil, Russia, India, China, South Africa, and the US. The index reflects the returns achieved over the past 12 months for the S & P 500, Dow Jones Industrial Average (Dow), and other major global equity indices, based on the performance of these indices and the growth rates of their respective markets. In the first six months of this year, it has returned on an annual basis of 6.4% (in Canadian dollars), while the mSCi Emerging markets The IPI index has a yield of 6.2%, according to Fidelity.
The 22% MER is the highest of any Canadian-American index ETF but still below the 22.5% of the S & P 500 and the 23.3% of the Dow Jones Industrial Average. Canadian investors could buy the EEM, which is traded in US dollars on the US stock exchange and has a yield of 2.2% (in Canadian dollars). According to Fidelity data, Canadian investors may find it more attractive to buy the MSCI Emerging Markets IMI Index Canada (the “index”) instead, traded in Canadian dollars on Canadian exchanges and has an annual return of 6.4%.
According to Fidelity data, investors could also invest in emerging markets at a slightly lower cost with the MSCI Emerging Markets ETF Canada (MER), which costs $0.23. ETFs (FLBA and TSX) are actively managed and balanced, but some investors find this realignment difficult. For example, the Smart Beta ETF is managed in San Mateo, California, by a team of professionals with over 20 years of experience in the investment management industry.
The fund’s only downside is that the cost ratio of $0.65 is higher than the average cost ratio for emerging market ETFs, which is still a fair price for this type of exposure. Canadian equity index ETFs can be developed for those who prefer to build their ETF portfolio. As Vanguard classifies the volatility of the ETF as low to medium, it is expected to be much more volatile than higher weighted ETFs.
The $0.14 cost ratio is relatively cheap for an emerging market fund, and it is lower than the iShares ESG MSCI EM ETF, which offers 43% less base to hold the same shares at a cost point than Vanguard Emerging Market ETF Canada, but you get an ES G overlay. Although returns are trailing dramatically behind the US market, the Vanguard Emerging Markets ETF has rewarded investors over the long term.
As you may have already summarized, no single index tracks all the major emerging markets globally, only the Emerging Markets Index (EMI). ETFs track the MSCI Emerging Market Index, an index of more than 1,000 emerging markets worldwide.
This ETF offers exposure to all significant emerging markets globally and other countries in Europe, Asia, and Latin America, except for the US. Vanguard comprises the US and international emerging market bonds weighted by region and market capitalization.
Emerging markets are used by the Vanguard Emerging Markets ETF (VWO), which has a market capitalization of $1.5 billion and holds more than 800 stocks. It is linked to the MSCI Emerging Markets Index, which measures the return on investments in the futures contracts that track the index and other global markets.
For those looking for a smaller company, the WisdomTree International SmallCap Dividend ETF does an excellent job of building a diversified portfolio. Investors can choose an all-in-one asset allocation ETF or a themed ETF. For example, horizon focuses on physical replication rather than total return swaps, and investors can add a combination of equities, bonds, mutual funds and other assets to the “thematic” ETF.
The difference is even more remarkable when you consider that Vanguard’s FTSE index provider considers developed markets to be more important than emerging markets in terms of market capitalization. As a result, it represents the Emerging Markets Index. This weighted index invests in emerging markets by market capitalization, covering stocks, bonds, commodities, currencies, and other assets such as real estate. ETFs offer a diversified portfolio of equities and bonds from various countries worldwide, from the United States, Europe, Asia, Africa and Latin America to the Middle East, Asia Pacific, and emerging Africa.
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Sources
- https://canadiancouchpotato.com/2020/12/20/asset-allocation-etf-showdown-vanguard-vs-ishares/
- https://www.newswire.ca/news-releases/horizons-etfs-launches-corporate-class-emerging-markets-etf-854235415.html
- https://www.investopedia.com/articles/etfs-mutual-funds/071516/top-3-etfs-tracking-msci-world-index-urth-vt.asp
- https://www.canadianportfoliomanagerblog.com/understanding-emerging-markets-equity-etfs/
- https://www.theglobeandmail.com/featured-reports/article-six-emerging-market-etfs-for-investors-seeking-global-diversification/
- https://financialpost.com/investing/funds/franklin-templeton-boosts-canadian-etf-offerings-with-emerging-markets-play
- https://www.etfstrategy.com/horizons-launches-tax-efficient-emerging-markets-etf-in-canada-98547/
- https://www.kiplinger.com/investing/etfs/601057/10-best-emerging-markets-etfs-for-a-global-rebound