The Best Canadian Emerging Market ETFs for September 2022

Posted on September 23, 2022 by Dylan Callaghan

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 home to some of the best dividend paying stocks with the largest economic moats in the world, like our telecom or pipeline companies. 

It's why many investors new to buying stocks make investments here in Canada. 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.

Quick note to readers if ETFs is your focus, we cover several areas in ETFs, don't skip our comparison between VEQT vs VGRO.

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 $1.46 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. 75% of the ETF is made up of large-cap stocks, while just shy of 4% 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 65.9% to investors. Prior to the market correction in late 2021, this fund was performing exceptionally well. However, 5-year returns at the time of writing have all but been wiped out due to the drastic correction in 2021/2022.

Overall, this isn't a super attractive option for income seekers as the fund only yields 2.2%. 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 48,000 changing hands every day.

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 shy of $1B 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 3.2% 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 fund has returned 4.11% annually over the last decade, and 1.2% annually over the last 5 years. However, the main culprit of the low 5 year returns is the significant market correction in 2021/2022.

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

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 $1.19 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 0.28%, and has a distribution of around 3%.

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. 

In terms of sector exposure, BMO's ETF contains a little less technology coming in at a 21% allocation, and 21%~ towards financials. The geographical exposure is much the same too, with 29%~ towards China, 14%~ towards Taiwan and South Korea and just under 14% 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 2% annually to investors. Which, is nothing to write home about but is also much higher than the other funds. Over the last 10 years, it has also produced annualized returns of 5.13%.

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.

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. 

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, even with how minimal it may be.

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.


Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed in this article. Stocktrades Ltd may also be compensated via affiliate links in this post.

Dylan Callaghan

About the author

Dylan is the co-founder of Stocktrades.ca and an avid self-directed investor. He holds a portfolio of Canadian growth and dividend growth stocks, and believes that anyone, regardless of financial status, stands to benefit from investing in the stock market. His ultimate goal with his writing and the continual development of Stocktrades.ca is to create a resource that helps Canadians, and investors from around the world, make more money and retire earlier.

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