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The Best Canadian Emerging Market ETFs for May 2021

We’ve often been told that Canadians have a "hometown bias" when it comes to Canadian ETF or stock selection. This might be because Canada is hope to some of the best dividend paying stocks with the largest economic moats in the world, like…

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We've often been told that Canadians have a "hometown bias" when it comes to Canadian ETF or stock selection.

This might be because Canada is hope to some of the best dividend paying stocks with the largest economic moats in the world, like our telecom or pipeline companies. However, diversification is still key.

So, many are taking this to heart and are looking for Canadian emerging market ETFs to gain more exposure not only outside of Canada, but outside of North America.

The issue however lies in the fact that emerging markets are relatively unknown to the average retail investor, and they do carry with them some added risk.

After all, emerging markets are not as established as the major exchanges here in Canada, the United States and Europe and as a result lots are hesitant to invest.

Fortunately for you, there are some great emerging market ETFs here in Canada that provide broad exposure to some markets that are definitely not easy to get exposure to if you're picking individual stocks.

I'm going to go over some of the best emerging market ETFs here in Canada, primarily from each major ETF distributor here in Canada. 

The top Canadian emerging market ETFs to be buying right now

FTSE Emerging Markets All Cap Index ETF (TSE:VEE)

I am a huge fan of Vanguard products. Primarily because they offer ridiculously cheap products in most situations and have some of the best overall returns on their ETFs.

The FTSE Emerging Markets All Cap Index ETF (TSE:VEE) is one of the best emerging market ETFs you can own here in Canada.

The ETF aims to track the Emerging Markets All Cap China A Inclusion Index and has been around since 2011. It has over $1.5 billion in assets under management and currently sports a management fee of 0.24%, meaning you'll pay $2.40 for every $1000 invested.

Considering how difficult it is to get solid exposure to emerging markets via purchasing direct stocks, this is a management fee that is well worth the cost.

The emerging market ETF has a whopping 5,202 holdings and a median market cap of just under $32 billion. 65% of the ETF is made up of large cap stocks, while just shy of 10% is emerging small caps.

Geographical exposure, this ETF has very high exposure to China, Taiwan and India, as the countries combined make up nearly 70% of the ETFs total exposure, China being over 40%.

In terms of sector exposure, over a quarter of the ETF is allocated towards emerging technology companies, and just shy of 20% is allocated towards financial companies.

You'll see popular international companies like Tencent Holdings, Alibaba Group and Taiwan Semiconductor make up the top holdings inside of the ETF.

Over the last decade, the fund has returned 96.08% to investors, or just shy of a double digit average annual return.

However, over the last 5 years, especially since the COVID-19 crash its returns have been accelerating. In fact, over the last half decade, the ETF has returned 62.1% to investors.

Overall, this isn't a super attractive option for income seekers as the fund only yields 1.61%. But, we should be looking for capital growth here, as most of these ETFs will be set up for that objective.

In terms of liquidity, the average retail investor will have no problem buying and selling shares, with over 96,000 changing hands every day.

FTSE Emerging Markets All Cap Index ETF 10 year return

iShares Core MSCI Emerging Markets IMI Index ETF (TSE:XEC)

The iShares Core MSCI Emerging Markets IMI Index ETF (TSE:XEC) isn't as popular as Vanguard's in terms of overall volume and does have a little higher management fee, although the increase (0.27% with this ETF vs 0.24% with Vanguard's) is almost negligible, unless you have significant capital invested.

But this is still a great emerging market ETF here in Canada, and attracts the attention of a lot of Canadian investors.

The ETF has just over $1 billion in assets under management and started in April of 2013. Total underlying holdings exceed 2500 and the ETF pays a semi annual distribution in the 1.6% range.

However, many looking up this ETF's holdings will be confused, as all they will see is a single ETF and cash. However, that is because this emerging market ETF is simply a way to buy the US traded iShares emerging market ETF IEMG.

However, when we look at the underlying holdings of that ETF, we can see it contains many of the same holdings as Vanguard's. However, the allocations are a bit different.

Taiwan Semiconductor is the top holding, while Tencent Holdings, Alibaba Group, Samsung Electronics and Meituan round out the top 5.

This ETF is also less reliant on China, having just under 35% exposure. After that, other major economical exposure sits at 15.04% for Taiwan, 14.20% for South Korea and 9.75% to India.

In terms of performance, the iShares emerging market ETF has outperformed Vanguard's, but it's relatively close. Over the last half decade, the emerging market ETF has returned 66.81% and since inception in 2013, 81.66%.

Overall, this is a strong emerging market ETF that you can stash away to gain easy exposure to international equities.

iShares Core MSCI Emerging Markets IMI Index ETF performance

XEC Emerging Market ETF Returns

BMO MSCI Emerging Markets Index ETF (TSE:ZEM)

I'm a big fan of BMO ETF products, the BMO MSCI Emerging Markets Index ETF (TSE:ZEM) being no different.

BMO's emerging market ETF has exposure to over 26 emerging market countries and has over $2.3 billion in net assets, making this the largest Canadian emerging market ETF on this list.

It also has relatively the same fees as both Vanguard and iShares products at 0.25%, and has around the same distribution as well, coming in at 1.65%~ .

In terms of holdings, the makeup is very similar to both emerging products listed above. Taiwan Semiconductors, Tencent Holdings, Alibaba Group Holdings and Samsung Electronics make up the top 4. 

However, the difference lies in the fact that the BMO emerging market ETF contains just shy of 4% allocated towards the iShares MSCI Emerging Markets ETF EEM.

EEM is one of the largest emerging market ETFs in the world, with just under $32 billion in AUM and over 45 million shares exchanging hands every day.

In terms of sector exposure, BMO's ETF contains a little less technology coming in at a 21% allocation, and 18%~ towards financials. 

The geographical exposure is much the same too, with 37%~ towards China, 14%~ towards Taiwan and South Korea and just under 9.5% exposure to India.

In terms of overall performance however, this is the stand out emerging market ETF of the bunch.

Over the last 5 years, the ETF has returned just shy of 75% to investors, while the other two ETFs on this list have lagged it by about 7%. 

I've saved the best for last, and it's evident in the ETF's performance over the last half decade.

Considering the fact that fees are relatively equal as well as distributions, I view BMO's emerging market ETF as one of the best in Canada.

BMO MSCI Emerging Markets Index ETF performance

BMO Emerging Market ETF in Canada Performance

Overall, these 3 Canadian emerging market ETFs provide excellent exposure

If we look to the performance of these 3 emerging market ETFs, I tend to lean towards the BMO product. 

Canadian Emerging Market ETFs total returns over last 5 years

With the difference in fees being negligible between the 3 options and distributions being relatively equal, I'd gravitate towards the one with the best performance.

However, past is never indicative of future results.

And with the overall makeups of most of these emerging market ETFs being relatively the same, they'll likely perform in line with each other. So choosing one or the other isn't a game changer.

All 3 of them give you great exposure to markets outside of North America, particularly China and Taiwan, and investors looking to take advantage of growth in external markets can do so relatively easily.

Just keep in mind that emerging market ETFs are prone to external regulatory and political risks that you may not see in more established markets.

I wouldn't necessarily label these emerging market ETFs as "high risk", but investors assume much more risk with these emerging market ETFs than they would investing in say a TSX 60 ETF


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