The Best Canadian Emerging Market ETFs for September 2023

Posted on September 27, 2023 by Dylan Callaghan
The Top Emerging Market ETFs in Canada

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We've often been told that Canadians have a "hometown bias" regarding Canadian ETF or stock selection.

This might be because Canada is home to some of the best dividend-paying stocks with the most significant 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 vital.

So, many are taking this to heart and looking for Canadian emerging market ETFs to gain more exposure outside of Canada and North America.

If ETFs are your focus, we cover several areas in ETFs, so don't skip our comparison between VEQT vs VGRO.

A warning, international ETFs carry more risk

These low-cost ETFs are great if your investment objective is to gain more exposure to international markets. However, you must understand they do carry additional risks.

Global markets outside of North America are relatively unknown to the average retail investor and carry some added risk. After all, emerging markets are not as established as the major exchanges here in Canada, the United States and Europe. As a result, lots are hesitant to invest.

Fortunately for you, some great emerging market ETFs here in Canada provide broad exposure to some markets that are definitely not easy to get exposure to if you're picking individual stocks. Some examples would be China, India, Russia, and Latin America.

I will go over some of the best-emerging market ETFs here in Canada, primarily from each major ETF distributor here in Canada.

The top emerging market ETFs to buy in Canada

  • FTSE Emerging Markets All Cap Index ETF (TSE:VEE)
  • iShares Core MSCI Emerging Markets ETF (TSE:XEC)
  • BMO MSCI Emerging Markets Index ETF (TSE:ZEM)

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 $1.6 billion in assets under management. Currently, it sports a management expense ratio 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 management fee is well worth the cost.

The emerging market ETF has a whopping 4,600~ holdings and a median market cap of just under $32 billion. 75%~ of the ETF comprises of large-cap stocks, while just shy of 5% is emerging small caps.

Geographical exposure, this ETF has very high exposure to China, Taiwan and India, as the countries combined make up nearly 66% of the ETFs total exposure, with China being over 30%. This Chinese exposure is something every investor will want to take into consideration, especially in recent times with political issues.

Regarding sector exposure, just over 16% of the ETF is allocated toward emerging technology companies, and just over 20% is allocated toward financial companies.

Popular international companies like Tencent Holdings, Alibaba Group and Taiwan Semiconductor make up the top holdings inside the ETF.

Over the last decade, the fund has returned 4.6% annually to investors. Before the market correction in 2021 and 2022, this fund performed exceptionally well. However, 10-year returns at the time of writing have been wiped out due to the drastic market correction in 2021/2022. This should highlight the extended risks of international markets.

The correction has made it an attractive option for income seekers as the fund yields 3%. But we should be looking for capital growth here, as most of these ETFs will be set up for that objective.

iShares Core MSCI Emerging Markets 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 has a slightly higher management fee. However, 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 many Canadian investors. The ETF has just shy of $920M in assets under management and started in April 2013. Total underlying holdings exceed 3000, and the ETF pays a semi-annual distribution in the 4.5% range.

However, many looking up this ETF's holdings will be confused, as all they will see is a single ETF and cash. However, 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 Vanguards. However, the allocations are a bit different. Taiwan Semiconductor is the top holding, while Tencent Holdings, Alibaba Group, Samsung Electronics and Reliance Industries round out the top 5.

This ETF is less reliant on China, with just under 29% exposure. After that, other significant economic exposure sits at 16% for Taiwan, 12% for South Korea and 14% for India.

In terms of performance, the fund has returned 4.33% annually over the last decade and -0.5% annually over the previous five 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. It has over $1.5 billion in net assets, making this the largest Canadian emerging market ETF on this list.

It also has relatively the same fees as Vanguard and iShares products at 0.28%. It has a distribution of around 2.75% at the time of writing.

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

Regarding sector exposure, BMO's ETF contains the largest allocation to technology, at 20%. Financials also make up around 21%. The geographical exposure is much the same, too, with 30%~ towards China, 14%~ towards Taiwan and South Korea and just under 14% exposure to India.

In terms of overall performance, this one has been impacted the most in the recent drawdown and has the worst 5-year returns. However, with 10-year annualized returns of 4.4%, it's been the best-performing emerging market ETF in terms of total return on this list.

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

Because 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 at the performance of these three emerging market ETFs, I lean towards the BMO product.

With the difference in fees being negligible between the three options and distributions being relatively equal, I'd gravitate towards the one with the best performance, even with how minimal it may be.

However, the 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. Investors looking to take advantage of the growth in external markets can do so relatively quickly.

Remember that emerging market ETFs are prone to external regulatory and political risks you may not see in more established markets. We've witnessed this right now with China.

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

See what Stocktrades.ca founder Dan Kent is investing in right now

Dan is on blossom with over 20,000 Canadian investors sharing insights and real-time trades:

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. Stocktrades Ltd will run advertisements on our posts. These advertisements do not represent an endorsement by us.

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.