One of the asset classes generating plenty of buzz as a 2021 idea is emerging markets. Up 4.5% over the past month, the MSCI Emerging Markets Index is already pricing in that enthusiasm. It’s about time. While U.S. equities soared over the past decade, emerging market equivalents traded mostly sideways.
Source: 3 Emerging Markets ETFs For 2021
Buoyed by a change of scenery at the White House, a weak dollar and attractive valuations, among other factors, there are tailwinds in place for developing world equities to flourish in the new year.
“An essential part of that potential mean-reversion, I believe, is the US dollar. For EM to outperform both cyclically and secularly we will need to see the dollar head lower,” writes Jurrien Timmer, Fidelity director macro in the firm’s asset allocation division. “After all, for a US-based investor, currency risk is an important part of the mix if you’re invested in non-US markets.”
With momentum in mind, here are three emerging markets ETFs to consider now and in 2021.
Alpha Architect Freedom 100 Emerging Markets ETF (FRDM)
The Alpha Architect Freedom 100 Emerging Markets ETF (CBOE: FRDM) is outperforming the MSCI Emerging Markets Index by nearly 50 basis points this year. Alone, that’s pretty impressive, but that statistic is even more surprising, pleasantly so, when considering FRDM doesn’t feature any direct exposure to China, one of 2020’s best-performing major equity markets.
FRDM’s freedom weighting methodology steers the fund’s geographic allocations away from countries with dubious human rights records, among other factors, so this is not the ETF for investors seeking China or Russia exposure.
FRDM’s feel-good story has material impact for investors. Due in large part to lower beta Taiwan and South Korea combining for over half the fund’s geographic weight, FRDM has a 39.19% weight to tech stocks, or about double the MSCI Emerging Markets Index’s weight to the same sector.
KraneShares Emerging Market Healthcare Index ETF (KMED)
The KraneShares Emerging Market Healthcare Index ETF (NYSE: KMED) is a hidden gem among emerging markets ETFs. Obviously, the U.S. has a robust health care sector, one with plenty of opportunities for investors of all risk tolerances, but KMED brings growth to the health care ETF table.
“By 2040, emerging market countries on average are projected to increase healthcare spending as percent of GDP by 24.4% compared to just 9.8% in developed markets over the same time period,” according to KraneShares.
KMED is already delivering for investors. The KraneShares fund is up 64% over the past year while the S&P 500 Health Care Index is higher by 13.12% over that time.
WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (XSOE)
Another way to potentially outperform traditional benchmarks, the WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (NYSE: XSOE) focuses on growth sectors by excluding companies in which governments own major stakes, also known as state-owned enterprises (SOEs).
XSOE dodges problem areas such as energy (low oil prices) and financial services (non-performing loans) to overweight growth sectors, such as communication services and consumer discretionary.
The strategy works as XSOE is higher by 23.06% this year.