Emerging markets are once again forming a larger part of private investors’ portfolios as they came out of the doldrums and performed brilliantly in 2017 and relatively well this year. However, it remains a complicated place with confusion over which markets are best to invest in, which index includes which country and whether the region is liquid enough to manage ETF-style investing. To address these issues, we have provided a range of options for diversified and growth-focused investing. This year’s selection includes a broad emerging markets fund, small-cap, minimum volatility and a China-focused ETF moved from the Asian equity category.
Dropped from 2017 selection
Xtrackers MSCI India Swap UCITS ETF (XCX5)
The panel supported removing this ETF for a variety of reasons. While XCX5 is a very good product at tracking the Indian equity market, it is derivative-based rather than physically replicating. The swap fee attached to this product would have pushed the total cost towards the 1.5 per cent mark for the past 12 months, making it prohibitively expensive. It has not been replaced as members of the panel felt the Indian equity market was still too volatile and illiquid to track via an ETF.
New list
iShares Core MSCI Emerging Markets IMI UCITS ETF (EMIM)
This iShares ETF retained its place because of its use of the Investable Markets Index (IMI) version of the MSCI Emerging Markets series. The IMI includes more than 2,500 stocks covering 99 per cent of emerging markets companies, whereas the MSCI Emerging Market index is more concentrated towards larger-cap stocks. EMIM remains the largest, most liquid and best tracking ETF following this index and has an ongoing charge of 0.25 per cent. However, it is not the cheapest emerging markets ETF. Amundi Index MSCI Emerging Markets UCITS ETF (AUEG) tracks the MSCI Emerging Market index with an ongoing charge of 0.2 per cent, and has amassed over £1bn in assets. EMIM is still substantially larger, though, with £7.5bn in assets.
SPDR MSCI Emerging Markets Small Cap UCITS ETF (EMSM)
While mid- and small-caps are included in the MSCI Emerging Markets IMI index, for a more focused small-cap strategy, the panel strongly supported keeping this SPDR ETF. iShares offers a larger MSCI Emerging Markets Small Cap ETF, however it is more expensive than SPDR’s 0.55 per cent ongoing charge. EMSM also has a very low bid/offer spread and strong liquidity and has outperformed the iShares product over the long term.
iShares Edge MSCI Emerging Markets Minimum Volatility UCITS ETF (EMV)
Emerging markets can be volatile and so the panel recommended keeping this minimum volatility ETF as a good way to smooth returns. This iShares ETF offers a solid strategy and has only started underperforming the wider market during the bull run that began in 2017 – which is to be expected. It still has a reasonable ongoing charge of 0.4 per cent. It tracks the MSCI Emerging Markets Minimum Volatility index, which takes stocks from the MSCI Emerging Markets index and weights them based on their ability to deliver the lowest absolute risk. Unlike other minimum volatility indices, this strategy focuses on the volatility relationship between stocks, and looks at the risk attached to individual stocks and limits country, sector and style exposure.
NEW: Xtrackers Harvest CSI300 UCITS ETF (RQFI)
Some panel members recommended replacing iShares MSCI China A UCITS ETF (IASH) with this ETF due to the index tracked. The CSI 300 includes companies from both the Shanghai and Shenzhen exchanges, and includes the 300 largest and most liquid A-share companies. This makes it more diverse than the 255 included in the iShares product and it has a very different sector focus. The CSI index has almost a quarter in energy stocks, while the MSCI China A index has its highest weighting in financials. Over three years and one year, RQFI has been the better performer, warranting its inclusion this time around. The Xtrackers ETF carries the same ongoing charge of 0.65 per cent. but is substantially larger offering good liquidity. It’s also worth noting that from June the MSCI Emerging Markets index will include China A-shares as well as China H-shares, although the inclusion of the former will be very gradual.
To view the IC Top 50 ETFs 2018 by category, please click on the links below:
Emerging market equities (four ETFs)
NEW: Sterling corporate bonds (two ETFs)
NEW: Global bonds (three ETFs)
Commodities and precious metals (three ETFs)
