Introduction to Emerging Markets ETFs: Definition and Context
Emerging markets comprise 24 countries according to the MSCI Emerging Markets index (ISIN: N/A, but referenced as MSCI EM Index). The main countries include China, India, Taiwan, Brazil, and South Korea. These economies are characterized by faster growth than developed markets, but also by increased volatility and specific risks (political, regulatory, governance).
ETFs dedicated to emerging markets allow diversified investment in these regions through a single listed instrument. Two major ETFs available to European investors are:
iShares Core MSCI EM IMI (EMIM, ISIN IE00BKM4GZ66): TER 0.18%, over 2800 companies, tracking the MSCI Emerging Markets Investable Market Index (IMI) which covers a broad range from large-cap to small-cap.
Vanguard FTSE Emerging Markets (VFEM, ISIN IE00BK5BQT80): TER 0.22%, based on the FTSE Emerging Markets index, slightly different in composition but comparable in exposure.
Sectoral and Geographic Composition and Weighting
China dominates the weighting of emerging markets, representing about 30% of the MSCI EM index (and thus the EMIM and VFEM ETFs). Next are India (~15%), Taiwan (~14%), South Korea (~13%), and Brazil (~5%). This geographic concentration is a key factor in understanding risks and opportunities.
Country
MSCI EM Weight (%)
Example ETF
China
30%
EMIM, VFEM
India
15%
EMIM, VFEM
Taiwan
14%
EMIM, VFEM
South Korea
13%
EMIM, VFEM
Brazil
5%
EMIM, VFEM
Historical Performance: Underperformance vs Developed Markets
Over the past 10 years, emerging markets ETFs have delivered an average annualized return of about +6% per year (in euros), compared to approximately +9% per year for the S&P 500 (source Bloomberg, data 2013-2023). This underperformance of -3% per year illustrates the challenges faced by emerging markets, notably China.
For example, the iShares Core MSCI EM IMI ETF (IE00BKM4GZ66) generated a net annualized return after fees of 5.9% over 10 years, while the iShares Core S&P 500 ETF (IE00B5BMR087) posted 9.0% over the same period.
Focus on China: Dominant Weight and Political Risks
China represents nearly 30% of emerging market indices, making it a major lever on overall performance. However, the country faces a high political risk and unpredictable regulation. Recent interventions in the technology and education sectors have heavily impacted stock valuations.
The Chinese government exercises strict control over companies, which can lead to sudden and significant declines. Furthermore, corporate governance quality and accounting transparency are often questioned by international investors.
India: Strong Growth but High Valuations
India is the second largest weighting (~15%) in emerging market ETFs. The Indian stock market, represented by the Nifty 50 index, experienced remarkable growth of +15% in 2023. This momentum reflects robust economic growth, driven by a young population, expanding domestic consumption, and structural reforms.
However, valuations are high, with a price-to-earnings ratio (P/E) around 25x, which limits short-term revaluation potential. This elevated valuation must be considered within a balanced investment strategy.
The Reverse "Home Bias": Why Europeans Overweight Emerging Markets
Contrary to the classic domestic bias (favoring one’s national market), European investors tend to overweight emerging markets out of fear of missing future growth. Indeed, while developed markets stagnate, emerging markets are seen as the main source of global growth (85% of the world’s population).
However, this overweighting can expose investors to increased risks, notably volatility and geopolitical risks. A prudent and diversified allocation is recommended.
Arguments for Investing in Emerging Markets
Global population: 85% live in emerging countries, offering a vast domestic market.
Economic growth: GDP growing on average +4% per year, higher than developed countries.
Attractive valuations: Average P/E around 14-16x, lower than developed markets exceeding 20x.
Diversification: Exposure to sectors and dynamics uncorrelated with developed markets.
Arguments Against: Structural Risks and Quality
Corruption and governance: High risks in several countries, impacting corporate stability.
Political risk: Instability, nationalizations, or abrupt regulatory changes (e.g., China).
Accounting quality: Sometimes less rigorous standards, weak minority shareholder protection.
High volatility: Markets sensitive to global crises and capital flows.
Reasoned Allocation: Integrating Emerging Markets via a Global Fund
For a European investor seeking balanced exposure, one solution is to favor a global ETF such as the Vanguard FTSE All-World UCITS ETF (VWCE, ISIN IE00BK5B8133), which includes about 10% emerging markets. This approach reduces specific risk while benefiting from global diversification.
It is also possible to deliberately overweight emerging market ETFs (EMIM or VFEM) in a reasonable proportion (10-20% of the portfolio) to capture growth while limiting risks related to overly concentrated exposure.
Quick Comparison of the Two Major Emerging Markets ETFs
Characteristic
iShares Core MSCI EM IMI (EMIM)
Vanguard FTSE Emerging Markets (VFEM)
ISIN
IE00BKM4GZ66
IE00BK5BQT80
TER
0.18%
0.22%
Number of Holdings
2800+
1200+
Underlying Index
MSCI EM IMI
FTSE Emerging Markets
China Exposure
~30%
~33%
10-Year Annualized Performance (EUR)
5.9%
5.5%
Conclusion: Should You Invest in Emerging Markets ETFs?
Emerging markets ETFs like EMIM or VFEM offer diversified exposure to high-growth economies. However, they present high volatility and specific risks, notably related to China and governance quality.
Recent underperformance compared to developed markets calls for caution and measured allocation. A reasonable exposure (10-20%) within a diversified portfolio, or via a global ETF like VWCE that includes emerging markets, allows capturing growth potential while limiting risks.
French investors with a PEA or securities account can use these ETFs to diversify their portfolio but should fully understand the risks and tailor their allocation to their profile.
Disclaimer: This article is for informational purposes only and does not constitute personalized investment advice. Past performance is not indicative of future results. It is recommended to consult a financial advisor before making any investment decisions.
