Emerging Markets ETFs (EMIM, VFEM): Should You Invest?
Emerging markets (EM) have historically attracted investors seeking superior long-term growth. Among the flagship ETFs in France, iShares Core MSCI Emerging Markets IMI (EMIM - ISIN IE00BKM4GZ66, TER 0.18%) and Vanguard FTSE Emerging Markets (VFEM - ISIN IE00B3VVMM84, TER 0.22%) are two popular options. This report analyzes their characteristics, performances, sectoral and geographic exposures to determine whether EM ETFs remain a relevant allocation in 2024 for the intermediate French investor.
1. Overview of EMIM and VFEM ETFs
| Characteristic | EMIM (iShares Core MSCI EM IMI) | VFEM (Vanguard FTSE EM) |
|---|---|---|
| ISIN | IE00BKM4GZ66 | IE00B3VVMM84 |
| Benchmark Index | MSCI Emerging Markets Investable Market Index | FTSE Emerging Markets All Cap China A Inclusion Index |
| TER | 0.18% | 0.22% |
| AUM (as of 04/2024) | ~âŹ10 billion | ~âŹ4 billion |
| Number of Holdings | ~2,700 | ~1,200 |
| Geographic Allocation (main countries) | China ~30%, South Korea ~13%, Taiwan ~14%, India ~9% | China ~30%, India ~12%, Taiwan ~14%, South Korea ~10% |
| Sector Allocation | Technology 30%, Financials 22%, Consumer Discretionary 12% | Technology 28%, Financials 20%, Consumer Discretionary 14% |
| Distribution | Accumulation (dividends reinvested) | Quarterly distribution |
2. Geographic Exposure: China Dominates
Both ETFs allocate about 30% of their portfolio to China, which remains by far the largest weighting in emerging markets. The combined weight of other Asian countries (India, South Korea, Taiwan) exceeds 40%. Note that India, with an average annual economic growth above 6% over the past decade (IMF), represents about 9-12% of the portfolios.
The strong exposure to China is a double-edged sword: on one hand, the worldâs second-largest economy with strong post-pandemic recovery potential; on the other, increased political risks (regulation, US-China geopolitical tensions) weighing on the valuation of Chinese equities.
3. 10-Year Performance: Underperformance vs. Developed Markets
Over the decade 2014-2023, emerging markets underperformed developed markets. In euros, the MSCI Emerging Markets (EMIM benchmark) delivered an annualized return of about 4.5%, while the MSCI World (developed markets) returned nearly 8% per year. EM volatility remains higher (around 18% vs. 14% for MSCI World).
This underperformance is explained notably by:
- Economic and political difficulties in China, weighing on growth and markets.
- Higher valuations in China and India, limiting upside potential.
- The strong dollar in recent years disadvantaging local currency assets.
It is worth noting that in 2023, emerging markets rebounded (~+10%) thanks to easing geopolitical tensions and Chinaâs economic recovery, but remain lagging over 3-5 years.
4. Arguments for Investing in EMIM or VFEM
- Superior long-term growth potential: Emerging markets host more than half the worldâs population and are expected to grow on average 4-6% per year, versus 2-3% for developed markets. India, in particular, benefits from favorable demographics and rapid digitalization.
- Geographic diversification: Exposure to Asian economies, but also Latin America and Eastern Europe, reduces correlation with Western assets.
- Attractive valuations: Despite recent increases, average P/E ratios stand around 15-18x, lower than developed markets (20-22x).
- Very competitive fees: TERs below 0.25% for EMIM and VFEM optimize net returns after fees.
- Accessibility: These ETFs are listed in Europe, in euros, facilitating direct investment via PEA or standard brokerage accounts.
5. Arguments Against and Associated Risks
- Political and regulatory risks: In China, sector regulation (technology, real estate) remains unpredictable. Sino-American trade tensions could resurface.
- High volatility: Emerging markets experience larger fluctuations, which can lead to significant short- and medium-term losses.
- Dependence on global conditions: Global demand, especially industrial, strongly impacts export-driven emerging economies.
- Sector concentration: These ETFs have heavy exposure to technology and financial sectors, which may suffer simultaneously during crises.
- Disappointing recent performance: Persistent underperformance over 10 years may discourage investors seeking more stable returns.
6. EMIM vs. VFEM Comparison: Which to Choose?
| Criterion | EMIM | VFEM |
|---|---|---|
| TER | 0.18% (lower) | 0.22% |
| Number of Holdings | ~2,700 (more diversified) | ~1,200 |
| Index | MSCI EM IMI (includes small and mid caps) | FTSE EM All Cap China A Inclusion (broader including Chinese A-shares) |
| China Exposure | ~30% | ~30% |
| Distribution | Accumulation (dividends reinvested) | Quarterly distribution |
| Liquidity | Very high (higher volume) | Good, but lower |
EMIM is often favored for its liquidity, lower cost, and broader coverage of emerging small and mid caps. VFEM includes Chinese A-shares, which may offer more comprehensive exposure to domestic China but with potentially higher volatility.
7. Verdict for the Intermediate French Investor
EMIM and VFEM ETFs remain relevant tools to diversify a portfolio with an allocation to emerging markets, especially for exposure to Asian growth. However, investors must accept higher volatility and potential underperformance in the short to medium term.
For an intermediate French investor:
- Favor EMIM for its lower TER, liquidity, and broader sectoral and geographic diversification.
- Allocate a moderate portion of the portfolio (10-15%) to emerging markets, complementing a solid developed markets base.
- Be patient: a recommended investment horizon exceeds 5 years to smooth volatility.
- Actively monitor geopolitical and economic developments, particularly in China and India.
In conclusion, investing in EMIM or VFEM is justified within a diversified long-term strategy but should not constitute the majority of the portfolio due to the specific risks associated with emerging markets.