Investing in emerging markets can be a double-edged sword. It offers the allure of diversification, but it's not without its challenges. The lack of information and the complexities of these markets can make investing a tricky business.
But here's where exchange-traded funds (ETFs) come to the rescue! Morningstar Canada has identified the top emerging-market equity ETFs that could be a smart addition to your portfolio. These ETFs provide a convenient way to access a diverse range of emerging-market stocks, and Morningstar analysts believe they have the potential to outperform their peers in the long run.
Understanding Emerging-Markets Equity Funds
Emerging-markets equity funds, as defined by the Canadian Investment Funds Standards Committee, are required to invest at least 90% of their equity holdings in a diverse range of securities from emerging markets. This ensures a broad exposure to these markets, but definitions can vary between index and fund providers. For instance, FTSE excludes South Korea from its portfolio, while other funds in the same category invest a significant portion in this market.
The Top 6 Emerging-Markets Equity ETFs for 2026
Morningstar has handpicked six ETFs that have earned their prestigious Medalist Rating, indicating a high level of confidence in their performance. These ETFs have 100% analyst coverage and fall into the emerging markets equity category, with assets of at least C$100 million as of February 24:
BMO MSCI Emerging Markets Index ETF (ZEM): This fund has seen impressive growth, outperforming its category average over the past 12 months. Its low fee and broad portfolio are advantages, but investors should be aware of the challenges of indexing in emerging markets.
iShares MSCI Min Vol Emerging Markets Index ETF (XMM): This ETF has a well-designed low-volatility strategy, which has helped it weather market drawdowns. Its risk-reward profile is impressive, but it may not keep up during market rallies.
iShares Core MSCI Emerging Markets IMI Index ETF (XEC): With a low fee and a solid performance, this ETF is a good choice for emerging-market exposure. However, the complexities of these markets may favor active management over a passive approach.
iShares MSCI Emerging Markets Index ETF (XEM): This fund provides a comprehensive view of the emerging-market universe, but its high fee and the limitations of indexing in these markets are points to consider.
Vanguard FTSE Emerging Markets All Cap Index ETF (VEE): Vanguard's offering has a broad portfolio and a very low expense ratio, making it a strong contender. However, geopolitical risks can introduce unexpected volatility.
iShares ESG Aware MSCI Emerging Markets Index ETF (XSEM): This ETF captures most of the emerging-markets universe while incorporating environmental, social, and governance (ESG) factors. Its low fee and broad portfolio are attractive, but indexing in these markets remains a challenge.
A Closer Look at the Top ETFs
Each of these ETFs has its own unique characteristics and strategies. Let's take a quick dive into each one:
BMO MSCI Emerging Markets Index ETF: This fund's performance is impressive, and its low fee is a significant advantage. However, investors should be mindful of the geopolitical risks and the challenges of indexing in emerging markets.
iShares MSCI Min Vol Emerging Markets Index ETF: This ETF's low-volatility strategy has proven effective, but it may not be the top performer during market rallies. Its risk-reward balance is a key feature.
iShares Core MSCI Emerging Markets IMI Index ETF: A low fee and solid performance make this ETF attractive. However, the complexities of emerging markets may favor active management.
iShares MSCI Emerging Markets Index ETF: While this fund provides broad exposure, its high fee and the limitations of indexing in emerging markets are noteworthy considerations.
Vanguard FTSE Emerging Markets All Cap Index ETF: Vanguard's ETF offers a broad portfolio and an ultralow expense ratio, making it a strong long-term choice. Geopolitical risks, however, remain a factor.
iShares ESG Aware MSCI Emerging Markets Index ETF: This ETF balances ESG considerations with market exposure. Its low fee and broad portfolio are appealing, but indexing challenges persist.
Final Thoughts
Investing in emerging markets can be a rewarding yet complex endeavor. These top-rated ETFs provide a convenient way to access these markets, but investors should be aware of the unique challenges and opportunities they present. And this is the part most people miss—the potential for significant growth comes hand-in-hand with increased risk. So, are these ETFs the perfect solution for diversification, or is there more to consider? Share your thoughts and experiences in the comments below!
