How to play emerging markets is at the top of investors agendas amid the ongoing trade war between the US and China and the unknown market implications from the coronavirus.
While these risks could impact prices in the short-term, the long-term outlook for some emerging markets will certainly entice investors, especially in this low return environment.
From broad-based strategies to single country products, there are numerous ways investors can slice and dice the emerging market arena.
In the build-up to ETF Stream’s Big Call: Emerging Market event on 12 March, we spoke to five fund buyers, who revealed their favourite emerging market ETFs listed in Europe and the reasons why they chose that ETF in particular.
Patrick Thomas, head of ESG investments at Canaccord Genuity Wealth Management
ESG integrated strategies tend to outperform in emerging markets with lower volatility. Furthermore, growing environmental consciousness will be a prominent theme over the next decade as emerging economies tackle emissions and waste more aggressively.
There are a few different ways to think about this in the ETF space. The more basic screened products still tend to have too much exposure to thermal coal and state-owned oil and gas companies.
The iShares MSCI EM SRI UCITS ETF (SUSM) tracks a reduced fossil fuel index and offers a high active share when compared with the traditional MSCI EM benchmark. Clients should be aware when owning this there tends to be a big underweight to China.
Raymond Backreedy, CIO at Sparrows Capital
Tricky one this, as the two main indices from FTSE Russell and MSCI differ somewhat in their country classification of emerging markets. And then there is the China weight within the two indices.
Overall, however, it is not one favourite but potentially two. Vanguard and iShares have some good ETFs tracking the above two indices, the iShares Core MSCI EM IMI UCITS ETF (EIMI) and the Vanguard FTSE Emerging Markets UCITS ETF (VFEM) would be my picks.
The charges for emerging market ETFs tend to display a larger lower-higher (0.14%-0.75%) range than say for example North America ETFs.
When filtering for full Vs partial, and physical vs. synthetic replication, we tend to favour the Vanguard and iShares EM ETFs. Not necessarily the cheapest, but good provenance, large AUM and relatively low tracking difference.
Factor investing in emerging markets
Liquidity scores tend to be high for the behemoths ETFs (iShares, Vanguard and SPDR), low bid/ask and good volumes in the secondary and primary markets. Here, size does matter.
Hoshang Daroga, quantitative investment manager at Copia Capital Management
On the emerging markets side, we have always preferred broad benchmark exposure for our portfolios rather than pick individual countries or tilt toward specific factors.
Having put through all the emerging market ETFs through our ETF screener, we found the iShares Core MSCI EM IMI UCITS ETF (EIMI) is the best in class when it comes to achieving the desired broad benchmark exposure.
Not only is it the largest EM ETF on the LSE with more than £10bn assets under management, but also has the tightest bid/ask spreads with competitive pricing and a low tracking difference, making it one of the most efficient ETFs available in the EM space.
With the latest round of fee reductions, it is also worth mentioning the HSBC MSCI Emerging Markets UCITS ETF (HMEF) which is now a close second.
Peter Sleep, senior investment manager at 7IM
I am going to select a China onshore ETF. There is a confusing choice of exchanges and indexes to choose from but I am going for a domestic onshore index because some of them appear to be better diversified and they are not dominated by one or two stocks.
One of the biggest challenges in the index world has been the gradual integration of the Chinese financial markets into our portfolios, both in equity and fixed income.
ETF Insight: Political issues overshadow MSCI’s A-Shares inclusion
The process is being managed very slowly, but very well, by the Chinese authorities and this has allowed a vibrant and interesting market to develop.
China is so large now that we may be forced to think about emerging markets equity in terms of China only and emerging markets ex-China.
For this reason, I am going to select two ETFs that reflect this – the iShares MSCI China A UCITS ETF (CNYA), an onshore China fund, which has good size and a very low bid-offer spread and, as a companion, the Lyxor MSCI Emerging Markets ex China UCITS ETF (EMXC).
Weixu Yan, head of ETF research at Close Brothers Asset Management
We favour the Amundi MSCI Emerging Markets UCITS ETF (AUEM) as a cost-effective, synthetic solution to capture emerging market exposure.
The securities held in this ETF tend to be easier to trade than that of the underlying EM index, as they are traded in more mature markets like Europe and Japan.
This is particularly important in the event of an EM ETF becoming insolvent, as we would avoid the difficulty of liquidating positions across various emerging markets with trading hours outside those of the UK.