Emerging markets

Emerging market equities are sometimes purchased by Canadians to provide portfolio diversification. International equities, in traditional definitions, are all equities outside the US, or North America. The definition of global equities includes US stocks. This section will consider emerging markets. US equities and international equities are considered in separate articles.

Emerging markets are generally considered to have higher risk than developed country markets. Specifically, on top of the higher volatility and currency risk, emerging markets face political risks, economic risks, regulatory risks and others.

Vanguard writes that "Efficient market theory and mean-variance analysis suggest that the investor should have a significant allocation to emerging-markets equities. Behavioral and practical considerations call for a smaller allocation. We recommend that risk-tolerant investors allocate a small portion of their international stock investments to emerging markets."

Emerging markets equities are often benchmarked against the MSCI Emerging Markets Index ("MSCI EM").

Emerging market indexes
Dow Jones, FTSE, Morningstar, MSCI, Russell, and S&P now provide emerging market indexes. Country representation varies among providers, as evidenced in the following table. The variation in index composition results in a dispersion of index returns.

Mutual funds and exchange-traded funds
Some actively managed Canadian mutual funds are available that allow Canadians to purchase emerging markets equities. Passively managed index funds or exchange-traded funds (ETFs) are also available.

TSX-listed ETFs covering emerging markets include the BMO MSCI Emerging Markets Index ETF (ZEM), the Vanguard FTSE Emerging Markets Index ETF (VEE), and the iShares MSCI Emerging Markets Index ETF (XEM).

Major US ETF vendors such as BlackRock and Vanguard offer ETFs that cover not only the MSCI EM but regional or country-specific indexes. An MSCI EM ETF with the symbol VWO is available from Vanguard. An alternative is iShares EEM ETF. Canadian investors can access US ETFs through their discount brokerage, but face currency conversion costs unless the ETFs are held in a US-dollar account.

One popular emerging markets subcategory involves investing in Brazil, Russia, India, and China. These four countries are collectively referred to as the BRIC countries. BRIC ETFs are available from several suppliers, one example is the TSX-listed iShares BRIC Index ETF (CBQ).