Emerging Markets Indexes

Best Emerging Markets ETFs for Irish Investors

Emerging Markets ETFs allow you to invest in companies based in China, India, Taiwan, South Korea, Brazil and many other emerging countries. Our top pick for the best overall Emerging Markets ETF is the Amundi Prime Emerging Markets UCITS ETF DR (C), a physical, accumulating ETF domiciled in Luxembourg with a TER of 0.10%. Its ISIN is LU2300295123.

Reading time: 8 min

Taipei 101 and the Taipei skyline in Taiwan at night, a key market in many Emerging Markets ETFs.
Table of Contents:

Written by:
Dan Malone

Share this article:

Why we picked this ETF

The Amundi Prime Emerging Markets UCITS ETF DR (C) (Acc) offers the lowest TER of any Emerging Markets ETF available to Irish investors with a physical structure at 0.10%. It’s a Luxembourg-domiciled fund with an accumulating, unhedged share class that uses a full replication strategy. It has a negative annualised tracking difference since inception.

Why we picked this ETF

The UBS Core MSCI EM UCITS ETF USD (Dist) offers the joint-lowest TER of distributing physical Emerging Markets ETFs available to Irish investors at 0.15%. It’s a Luxembourg-domiciled fund with a distributing, unhedged share class that uses an optimised sampling strategy. It has a negative annualised tracking difference since inception.

Why we picked this ETF

The Invesco MSCI Emerging Markets UCITS ETF (Acc) offers the joint-lowest TER of synthetic Emerging Markets ETFs available to Irish investors at 0.09%. It’s an Irish-domiciled fund with an accumulating, unhedged share class that uses a total return swap strategy. It has a negative annualised tracking difference since inception. The alternative option is the Luxembourg-domiciled BNP Paribas Easy MSCI Emerging UCITS ETF EUR (Acc) which has the same TER. We chose Invesco because they’re one of the most transparent providers of synthetic ETFs.

Why we picked this ETF

The iShares Core MSCI EM IMI UCITS ETF USD (Acc) provides exposure to the MSCI Emerging Markets IMI index – one of the most comprehensive benchmarks for Emerging Markets stocks, with 99% universe coverage. The fund has a TER of 0.18%. It’s Irish-domiciled with an accumulating, unhedged share class that uses a full replication strategy. It has a negative annualised tracking difference since inception.

Free Weekly Update

Free Weekly Update

Clear, practical insights on savings, pensions, banking, insurance, tax, and more.

    Emerging Markets Indexes

    There are four main indexes that are regarded as being representative of the Emerging Markets:

    FTSE Emerging Index

    The FTSE Emerging Index is made up of over 2,200 companies spanning 23 Emerging Markets.

    MSCI Emerging Markets Index

    The MSCI Emerging Markets Index is made up of over 1,200 companies across 24 Emerging Markets.

    MSCI Emerging Markets Investable Market Index (IMI)

    The MSCI Emerging Markets Investable Market Index comprises over 3,000 companies spanning 24 Emerging Markets.

    Solactive GBS Emerging Markets Large & Mid Cap Index

    The Solactive GBS Emerging Markets Large & Mid Cap Index has over 2,200 companies covering 26 countries.

    The biggest difference between these indexes is size. For example, the MSCI Emerging Markets IMI covers 99% of the total value of the Emerging Markets. Comparatively, the MSCI Emerging Markets Index covers 85%.

    Key Insight:

    The FTSE Emerging All-Cap Index and the S&P Emerging Broad Market Index (BMI) are two other well-known Emerging Markets indexes. The former includes over 4,700 companies while the latter has over 7,200.

    However, there are no readily available UCITS-compliant ETFs that provide Irish investors with their returns. For that reason, they’ve been omitted from this list.

    Comparing Emerging Markets Indexes

    Emerging markets indexes can differ significantly in their make-up. Certain indexes will include or exclude particular countries or companies depending on their methodology. This matters when selecting an Emerging Markets ETF. 

    You want to make sure that the ETF is tracking an index that will provide you with the Emerging Markets exposure that you’re looking for.

    Here are three ways that these indexes differ from one another:

    • 1

      Both the MSCI Emerging Markets & MSCI Emerging Markets Investable Market indexes have the exact same top 10 companies. However, the MSCI EM IMI covers well over $1 trillion in additional market cap.

    • 2
      The FTSE Emerging Index features largely the same top 10 holdings as MSCI. The biggest difference is that the FTSE Emerging Index doesn’t include South Korea. That’s because FTSE classifies South Korea as a ‘developed’ market. This is significant as Samsung and SK Hynix, which are South Korean companies, are among the largest companies measured by Emerging Markets indexes provided by MSCI and Solactive.
    • 3
      Similar to the MSCI Emerging Markets index, the Solactive GBS Emerging Markets Large & Mid Cap index covers 85% of the total value of the Emerging Markets. However, it includes nearly 1,000 more companies than MSCI.

    Physical vs. Synthetic Replication

    Not all Emerging Markets ETFs track the index return in the same way. Some will physically buy and hold the underlying shares, while others will use financial contracts to mirror the market’s performance. Here is how both methods balance a trade-off between cost and accuracy. 

    An Emerging Markets index contains thousands of companies. Some ETFs will choose not to own every stock that’s included in the index. Many of the smaller companies represent a tiny fraction of the total market capitalisation of the index. Their individual stock performance will not have a large impact on the performance of the index as a whole. Plus, buying shares in these smaller companies may come with higher trading fees that can hurt overall investor returns. The index return doesn’t account for these fees.

    To avoid this, certain Emerging Markets ETFs will exclude or replace smaller stocks with a correlated alternative(s) that comes with less trading fees. This is known as optimised sampling, which is a replication technique used by physical ETFs that ‘physically’ own shares in the companies tracked by an index. It is different to full replication, where every share is owned in direct proportion to the index.

    For Emerging Markets ETFs, optimised sampling may end up delivering better tracking of the index return than full replication. Again, that’s primarily due to trading costs. However, optimised sampling can also produce deviating results as the ETF doesn’t hold exactly the same investments as the index.

    Synthetic Emerging Markets ETFs use financial derivatives known as swaps to provide investors with the index return. These ETFs have been found to reduce tracking errors, where the returns of the ETF deviate from the returns of the index.

    The downside of physical Emerging Markets ETFs using optimised sampling is that it can increase tracking errors. That’s because the ETF is excluding or substituting index constituents from the fund. With a synthetic ETF, a counterparty would pay the total return of the Emerging Markets index directly to the fund, which can reduce tracking errors.

    On the flip side, synthetic ETFs may have higher total expense ratios (TER) and swap spreads which can lead to higher tracking differences, which arise due to the costs of ownership of an ETF.

    Total Expense Ratio (TER) Emerging Markets ETFs

    Emerging Markets ETFs tend to have higher total expense ratios (TERs) than both Europe ETFs and S&P 500 ETFs. When comparing TERs between Emerging Markets index funds, there’s a balance to be struck between coverage and cost. Let’s say you were deciding whether you should pay an extra 9 basis points (bps), or 0.09%, for an MSCI Emerging Markets Investable Market Index (IMI) fund instead of an MSCI Emerging Markets Index fund.

    Although the TER is higher, you’re getting well over $1 trillion in additional coverage. In other words, you’re paying 9 bps extra to gain exposure to 99% of the Emerging Markets as opposed to 85%. But bear in mind that each of the additional companies in the IMI will be very small. Their individual share performance will likely have a negligible impact on the ETF's returns. Also, if optimised sampling is used, the extent to which you have exposure to each of those additional companies will vary.

    The question is whether the additional coverage is worth the higher TER considering the additional companies will have a fractional impact on the ETF’s performance given their negligible weightings within the index. They represent the bottom 14% of companies in the Emerging Markets by value. The lower the value of a company relative to the index, the lower its impact on index returns.

    Frequently Asked Questions

    FTSE classifies South Korea as a developed market, while MSCI and Solactive classify it as an emerging market. This is a very significant difference. South Korean companies account for over 20% of the value of Emerging Markets indices that include them.

    Certain indexes, like the MSCI Emerging Markets ex-China Index, will measure the performance of Emerging Markets equities with the exception of China. Chinese companies account for nearly 20% of the value of an Emerging Markets index. An ex-China index will exclude major companies such as Tencent, Alibaba and China Construction.

    Yes, the Czech Republic, Hungary, Greece, Turkey and Poland are European countries that tend to be included as Emerging Markets by index providers. However, index providers won’t always agree on their classifications. For example, both FTSE and Solactive list Poland as a developed market, while MSCI and STOXX classify it as an emerging market.

    Euro-hedged share classes of Emerging Markets ETFs are expensive to operate. The fund manager needs to hedge the euro against over 20 local currencies in their exact weights relative to the index. Doing this successfully would result in a high total expense ratio (TER), making it difficult for the fund to provide the index return to investors.

    Compare ETFs Side by Side

    Ready to choose an ETF? Compare the most popular ETFs available to Irish investors by index, fees, dividends, and more to find the right investment for your portfolio.