The Best Canadian Emerging Market ETFs for December 2024

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. These are excellent companies that have historically provided solid total returns.

However, diversification is still vital. So many Canadians either stuff their portfolios with local stocks or diversify into the United States. That’s a good start and a solid methodology, but there’s a whole world out there.

Plus, exchange-traded funds make it easy to invest in these other markets, much easier than trying to find stocks on your own. 

Plus, investors looking to gain exposure outside of North America can do so by buying ETFs that trade on the Toronto Stock Exchange and in Canadian Dollars. No currency exchange is necessary. These are diverse portfolios wrapped up in an easy package that also comes with very reasonable expenses.

Let’s take a closer look at a few of the best.

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

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 historical annual overall returns on their ETFs.

The Vanguard 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 an inception date way back in 2011. It has over $1.6 billion in assets under management. Currently, it sports a management expense ratio of 0.23%, meaning you’ll pay $2.30 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 5,700~ holdings and a median market cap of just under $25 billion. 54%~ of the ETF comprises of large-cap stocks, while approximately 11% is emerging small caps.

Geographical exposure: this ETF has very high exposure to China, Taiwan and India, as the countries combined make up nearly 70% of the ETF’s total exposure, with China being just under 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 22% of the ETF is allocated toward emerging technology companies, while approximately 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 had a rate of return of 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 2.5%. But we should be looking for capital growth here, as most of these ETFs will be set up for that objective. It pays a quarterly distribution in January, March, June, and September.

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 (0.25% with this ETF vs 0.23% 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 fund’s assets are just under $1.4 billion in assets under management, and it started in April 2013. Total underlying holdings exceed 3000 different stocks

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. This is common practice and has been approved by the regulatory body, the US SEC.

However, when we look at the underlying holdings of that ETF, we can see it contains many of the same holdings as Vanguard’s. 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 24% exposure. After that, other significant economic exposure sits at 18% for India, 17% for Taiwan and just under 13% for South Korea.

In terms of performance, the fund has returned 4.38% annually over the last decade and 2.64% annually over the previous five years, before income taxes and other expenses.

However, the main culprit of the low 5-year returns is the significant market correction in 2021/2022. It pays a small dividend- currently around 1%- twice yearly in June and December.

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 $1.25 billion in net assets, making this one of the largest Canadian emerging market ETFs out there.

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 is the top holding. Tencent Holdings, Samsung, and Alibaba are also in the top five. An interesting wrinkle is that the second-largest holding is actually the iShares Emerging Market ETF at about 6% of total assets.

Needless to say, it is not normal for an ETF to hold a large amount of a competitor’s ETF as a top-five holding.

Regarding sector exposure, BMO’s ETF contains a 22% allocation towards financials, 21% in technology, and just over 12% in consumer discretionary.

The geographical exposure is much the same, with 27% going towards China, 15% going towards Taiwan, a 14% allocation to India, and just over 12% invested in South Korean stocks.

In terms of overall performance, this ETF is pretty close to its peers. It returned 2.65% annually over the last five years and 4.27% per year over the last decade. That’s slightly below the other two on this list over a decade, but it still offers solid returns.

Overall, these 3 Canadian emerging market ETFs provide excellent exposure

It’s hard to pick a favourite between these three ETFs simply because they’re so similar in every way. They hold similar portfolios and charge similar fees. Even the distributions are close to the same — with the exception of XEC.

The easy choice would be to gravitate to the one with the best long-term returns, which is VEE. It returned 4.6% per year over the last decade, slightly better than its peers. But we must always remember that past results do not guarantee any future performance. 

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.

In short, we don’t really have a clear-cut recommendation here.

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, and these risks could get much worse if China takes a more aggressive stance with Taiwan.

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 invest in, say, a TSX 60 ETF.

That makes it extra important for investors to be a little careful here. The fund documents — including the fund’s prospectus, its trading strategy, and other metrics — will have many of the answers investors seek.

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, many 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.