How 4 Advisors Use Emerging Market ETFs

September 29, 2020

[This article appears in our October 2020 issue of ETF Report.]

Samuel Deane
Financial Planner
Deane Financial Partners

Emerging markets make up about 10-20% of a globally diversified portfolio allocation for Samuel Deane’s clients, who generally are younger and can take on more risk. His clients’ portfolios lean heavily on equities, anywhere from 80-100%.

He includes emerging markets because they have the potential to create higher returns. “My investment philosophy regarding emerging market ETFs is that they can come in all shapes and sizes,” Deane said. “But not every fund, for lack of a better phrase, is worth your time and money.”

He has two starting criteria when it comes to an emerging market ETF: low fees, and ones that are large and liquid enough to buy and sell with no complications.

“Many low-cost index funds are competitive on price and have billions in assets that drive a higher average trading volume,” Deane explained. “Those are the sort of things that I look into when deciding which ETF to implement in our strategies.”

One of the emerging market ETFs he’s using is the Vanguard FTSE Emerging Market ETF (VWO), an index-based ETF that excludes South Korea. Deane says he likes that it offers broad-based exposure and invests in large and small cap stocks, including China A-shares.

However, Deane says he’s considering looking at other funds, too, because he wants to lessen his exposure to China. Mainland China, Hong Kong and Taiwan comprise more than 50% of the fund. Deane notes that he’s looking at the Freedom 100 Emerging Market ETF (FRDM), a principles-selected, market-cap-weighted index fund that has no exposure to mainland China or Hong Kong, although says he has not researched it deeply yet.

“It’s something I’ve thought about recently, although I haven’t made any changes,” Deane added.

Nate Fischer
Chief Investment Strategist
Strategic Wealth Partners

Nate Fischer uses emerging market ETFs for smaller accounts where buying individual securities would be costlier.

“If you’re looking for cheap, easy beta [in emerging markets], ETFs are the best way to play it,” Fischer said.

His firm uses both equity and fixed income products, many from the iShares suite, including the iShares Core MSCI EAFE ETF (IEFA) for broad equity exposure and the iShares Core International Aggregate Bond ETF (IAGG) on the fixed income side.

If Fischer has a macro theme or believes the U.S. dollar will outperform a certain country’s currency and wants a tactical allocation, he may consider a currency-hedged equity strategy using the offerings from WisdomTree.

When investing in emerging market bonds, Fischer says advisors need to think about the impact of the U.S. dollar so it doesn’t act as a head wind: “You’ve got to be cautious about that when you’re buying bonds.”

If the U.S. dollar is strong, he may employ the iShares Interest Rate Hedged Emerging Markets Bond ETF (EMBH), or if If the U.S. dollar is weaker, the unhedged iShares JP Morgan USD Emerging Markets Bond ETF (EMB).

In a portfolio breakdown, on the equity side, 20-30% of the portfolio is allocated to international holdings, with 40% of that to emerging markets. On the fixed income side, Fischer treats bonds similarly to high yield holdings—anywhere from 0-15%.

“They do offer pretty decent yields, but you’re assuming a lot of risks versus a 10-year Treasury,” he noted.

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