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Investing in emerging markets can help diversify a portfolio, but this can be difficult, given the challenge of researching, buying, and selling stocks that aren’t listed in Canada. Exchange-traded funds offer an easy way to gain exposure to emerging markets while minimizing those difficulties.
We’ve screened the 25 ETFs in Morningstar’s Canadian emerging markets equity category for those with Bronze, Silver, or Gold Morningstar Medalist Ratings, meaning our analysts expect them to outperform their categories’ index or median over the long term. We also excluded funds with less than C$100 million in assets. The four funds that made the cut are all index funds, with three tracking variants of the MSCI Emerging Markets Index.
For this story, we highlight the best four emerging market stock ETFs as evaluated by Morningstar analysts:
BMO MSCI Emerging Markets ETF ZEMVanguard FTSE Emerging Markets All Cap Index ETF VEEiShares Core MSCI Emerging Markets IMI ETF XECiShares ESG Aware MSCI Emerging Markets ETF XSEM
Screening for the Best Canadian Stock ETFs
We screened for ETFs with Gold, Silver, or Bronze Medalist Ratings that are 100% assigned by Morningstar analysts, rather than indirectly or quantitatively assigned.
Here’s a closer look at the ETFs. A table with their recent performance is at the end of this article.
BMO MSCI Emerging Markets ETF
Morningstar Medalist Rating: BronzeMorningstar Rating: Three Stars
This C$1.4 billion fund tracks the MSCI Emerging Markets Index, which invests in large- and mid-cap stocks from 24 emerging markets. The fund holds about 800 stocks that aim to be a representative sampling of the more than 1,200 stocks in the index. “The index targets stocks landing in the top 85% as ranked by their free-float-adjusted market cap,” says Morningstar manager research analyst Lan Anh Tran, meaning it excludes the smallest 15% of firms.
Vanguard FTSE Emerging Markets All Cap Index ETF
Morningstar Medalist Rating: BronzeMorningstar Rating: Three Stars
The C$2.5 billion Vanguard FTSE Emerging Markets All-Cap Index ETF tracks the FTSE Emerging Markets All Cap China A Inclusion Index. It tracks the index by holding the US-based $116 billion Vanguard FTSE Emerging Markets ETF VWO. This index is similar to the MSCI Emerging Markets Index, but it also includes small-cap stocks, with a cutoff of stocks within the top 98% of funds by market cap, compared to 85% for the BMO MSCI Emerging Markets ETF. In addition, the FTSE index holds stocks from Iceland and Romania, and excludes stocks from South Korea, Peru, and Poland. The fund holds close to 5,000 different stocks. With a management expense ratio of 0.25%, it’s the cheapest of the four funds.
iShares Core MSCI Emerging Markets IMI ETF
Morningstar Medalist Rating: BronzeMorningstar Rating: Three Stars
The C$2.2 billion iShares Core MSCI Emerging Markets IMI ETF tracks the MSCI Emerging Markets Investable Market Index. The investable market index differs from the regular MSCI Emerging Markets Index, as it also includes small-cap stocks, with holdings covering the top 99% of market capitalization in the markets it invests in. The fund holds more than 3,000 stocks.
iShares ESG Aware MSCI Emerging Markets ETF
Morningstar Medalist Rating: BronzeMorningstar Rating: Three Stars
The C$4.1 billion iShares ESG Aware MSCI Emerging Markets ETF is the largest fund on the list, as well as the only one that utilizes environmental, social, and governance characters in its investment decisions. It tracks the MSCI Emerging Markets Extended ESG Focus Index, holding over 300 stocks. The index uses a mathematical model called an optimizer to invest in stocks with as high ratings in ESG characteristics as it can while still maintaining a roughly 1% tracking error to the MSCI Emerging Markets Index.
“Sector and country weightings must stay within 5 percentage points of their original weightings in the parent index, while individual stocks must stay within 2 percentage points,” says Tran.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
