Diversification is an important tactic against market fluctuations and portfolio crashes. But you don’t need to limit yourself to the typical “sector-wise” diversification, i.e., investing in different industries and asset-class diversification. Geographical diversification can be a powerful (and profitable) ally and can grant you access to a new array of growth opportunities (that you can’t find locally).
I’ve always found emerging markets much more exciting than the saturated, mature market that Canadian investors are used to. They also help rid your portfolio of the home bias (i.e., locally concentrated investments) and, instead, want to add some international exposure to your investments; this article will help you find the best emerging market ETF Canada.
1. iShares Core MSCI Emerging Markets IMI Index ETF
Dividend Yield (12-Month Trailing): 2.89%
Assets Under Management: $744 million
Main Regions: East Asia
The first Emerging market ETF, is from BlackRock. The ETF is made up of equities (not bonds, unlike many emerging market ETFs), and has 2477 underlying holdings. The core holding inside the ETF is a portion of a US ETF with net assets of US $55 billion under management. The four largest equities in the ETF are Alibaba, Tencent (A Chinese holding company), Taiwan Semiconductor Manufacturing Company (one of the world’s most valuable semiconductor companies), and Samsung Electronics. These four companies make up about 21% of the total weightage.
Geographical distribution of the ETF leans heavily towards China and Taiwan that make up 52% of the fund. It’s a theme you’ll find very repetitive amongst some of the best emerging market ETFs. South Korea and India are the third and fourth most prominent regions. Sector-wise distribution of holdings is a bit more even, with consumer discretionary, IT, Financials, and communications taking the lead.
The reason why this ETF tops our list is that, apart from offering a generous yield (for an ETF) of 2.89%, it also provides decent capital growth potential. The stock has a five-year CAGR of 7.76%. One negative aspect of this ETF is that its distributions are bi-yearly.
2. FTSE Emerging Markets All Cap Index ETF
Dividend Yield (12-Month Trailing): 2.4%
Assets Under Management: US $1.0 billion
Main Regions: East Asia, India, and Brazil
The second ETF is, ironically, from the second largest investment management company in the world: Vanguard. Regionally, four countries make up 75% of the share: China (43.8%), Taiwan (16.2%), India (9.5%), and Brazil (6.2%). The sector-wise exposure is slightly different, with financials in the lead, technology, and consumer services in second and third. The three most extensive holdings are the same: Alibaba, Tencent, and Taiwan Semiconductors, and the total number of holdings are over 5,000.
The fund also has the potential for capital growth. Its five-year CAGR (adjusted for dividends) is 7.3%, and the fund showed remarkable recovery after the pandemic-driven crash in the regional markets. It’s already trading at a price just 1.7% down from its pre-pandemic high. This shows the resilience of the emerging markets that make up this fund. It pays quarterly dividends. The fee and MER are low enough that they won’t shift your bottom line too much unless you are investing a hefty amount.
3. RBC Quant Emerging Markets Dividend Leaders ETF
Dividend Yield (12-Month Trailing): 3.3%
Assets Under Management: $37 million
Main Regions: East Asia and India
This little ETF with not-so-little a fee is from the Royal Bank of Canada. The ETF pays monthly dividends and offers the best yield on this list. It’s the five-year growth rate, though not as fancy as the previous two, is still better than negative (4.11%). This fund is also focused on China, Taiwan, South Korea, and India. Together, the four emerging markets make up 71% weight of the fund. It’s the first fund with a very “manageable” number of holdings: 177. It’s probably because this ETF is created with dividends in mind, and most of the underlying holdings might pay regular dividends.
It might also be the reason why the fees are so high. Synchronizing different dividends, some of them monthly, some quarterly, and some may be on a different frequency, to pay a neat monthly dividend must require some serious active planning.
Its top holdings don’t include Alibaba, but Tencent, Samsung, and Taiwan Semiconductors are there and make up about 19% of the fund’s weight. It’s rated Medium to High risk (That’s fourth on a scale of five, with five being the riskiest).
4. BMO MSCI Emerging Markets Index ETF
Dividend Yield (12-Month Trailing): 2.39%
Assets Under Management: $1.98 billion
Main Regions: East Asia and India
This sizeable ETF is from the Bank of Montreal. It’s the fastest-growing ETF on this list (and probably the oldest), with an annual growth rate of 8.67% (based on the past five year’s growth). But there is a catch. It distributes its earnings annually, which might make it less attractive to dividend investors. It tracks the progress of 26 emerging markets, but the bulk of the weight is made up of China, Taiwan, South Korea, and India as usual.
Its holdings are a bit different, in a sense that the bulkiest holding inside the fund is another ETF, the Ishares MSCI Emerging Markets ETF from BlackRock, which makes up 11.31% of the fund. The rest of the top five are exactly the same as the first ETF on this list, and together, the five holdings make up one-third (33.3%) of the fund. The total number of holdings is 866.
5. Mackenzie Maximum Diversification Emerging Markets Index ETF
Dividend Yield (12-Month Trailing): 2.2%
Assets Under Management: $74 million
Main Regions: East Asia and India
The last fund on this list has thankfully, mixed things up a bit. In this fund, the regional distribution is a bit different, and after China, which makes up 25.4% weight of the fund, there is India with 19.6% weightage and then Taiwan at 13.5%. The sector-wise distribution is also a bit different, and healthcare leads with IT as the second. It’s also the youngest ETF here and was created just three years ago.
The top-five holdings in the fund are NIO inc. from China (a smart car manufacturer), Taiwan Semiconductor, Gold Fields Ltd. from South Africa (one of world’s largest gold mining firms), AngloGold Ashanti which is also from South Africa (another gold mining company), and Li Ning (sports shoes and goods company). This fund is a bit different, and as it’s just three years old, it’s yet to be seen how it will progress. It’s creator, Mackenzie investments might not be as well known as BlackRock, but it’s a sizeable enough investment firm that’s been around for 50 years and has over $141 billion worth of assets under management.
How to Buy Emerging Market ETFs in Canada
There are many ways to buy Emerging Market ETFs in Canada, but the cheapest way is by using a discount broker.
I use the discount broker Questrade for all my stock and ETF trading. You can buy Emerging Market ETFs like the ones mentioned in this article for free using the broker. Be aware that there is a fee to sell them though.
Get $50 in free stock trades with this offer when you open an account at Questrade.
Adding one of the best emerging market ETF Canada in your portfolio won’t just give your portfolio geographic diversification, but may also introduce unprecedented growth to your portfolio. Many emerging markets, especially China, showed rapid economic recovery after the pandemic. And once the US-China trade war settles, Chine-heavy ETFs might perform better than many local indices.