Emerging markets

Emerging market equities are sometimes purchased by Canadians to provide portfolio diversification. US equities and developed market international equities are considered in separate articles. Emerging markets include countries like China, India, Russia, Brazil, and so on.

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.

Although emerging market equities are imperfectly correlated with other equity regions, making them potential portfolio diversifiers, Harvey finds that "coskewness measures for emerging markets are more negative suggesting that these markets are contributing to the negative skewness of a diversified portfolio". Negative skewness means that good returns are more common that bad ones, but that the bad returns are more extreme (think disasters), which is typically seen as undesirable, and can be compared to a "reverse lottery ticket".

Many of these risks can be mitigated, at least in part, by investing in all emerging markets simultaneously through a product that follows one of the broad EM indices described below, rather than trying to pick individual countries.

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." Some of these practical considerations are higher costs and additional taxes.

Emerging market indices
Emerging markets equities are often benchmarked against the MSCI Emerging Markets Index ("MSCI EM"). As of September 2021, the top 5 countries were China, Taiwan, South Korea, India and Brazil. An index which covers the same 27 countries but even more companies is the MSCI Emerging Markets IMI index, which "captures large, mid and small cap representation", and is used by some funds listed below.

Another EM index, used in some Vanguard products (see below), is maintained by FTSE. The MSCI and FTSE indices differ mostly by the inclusion or exclusion of South Korea, which can be considered either an emerging market or a developed market depending on the index provider. Therefore, if purchasing separate investment products for developed international equities and emerging markets, make sure they are both based on the same family of indices (e.g., MSCI or FTSE), otherwise Korea may end up duplicated, or missing entirely, from the resulting portfolio.

Mutual funds
Some actively managed Canadian mutual funds are available that allow Canadians to purchase emerging markets equities. Passively managed index funds are also available.

Canadian-listed ETFs
ETFs covering emerging markets and listed on Canadian stock exchanges include:
 * Vanguard FTSE Emerging Markets All Cap Index ETF (VEE)
 * iShares Core MSCI Emerging Markets IMI Index ETF (XEC)
 * BMO MSCI Emerging Markets Index ETF (ZEM)

US-listed ETFs
Notable US-listed emerging market ETFs include:
 * Vanguard FTSE Emerging Markets ETF (VWO)
 * iShares Core MSCI Emerging Markets ETF (IEMG)

Canadian investors can access US-listed ETFs through their discount brokerage, but face currency conversion costs unless the ETFs are held in a US-dollar account. For emerging markets, these US-listed ETFs may be more tax-efficient than Canada-listed equivalents in some account types.

Major vendors such as Vanguard and Ishares also offer ETFs covering regional or country-specific indexes.

See Canadian- vs US-listed ETFs for a general comparison.

Other ETF options
Many investors who want emerging market exposure opt for a dedicated ETF to cover this asset class. However, it is also possible to combine EM exposure with other asset classes. This offers convenience, but may involve higher management fees and less control on specific allocation percentages.

Two notable global equity ETFs (which combine all ex-Canada stocks, i.e. from US, international and emerging markets) trading in Canada are: According to one expert, these two ETFs have a very similar asset allocation, MER, tax-efficiency, and long-term tracking error.
 * Vanguard FTSE Global All Cap ex Canada Index ETF (VXC)
 * iShares Core MSCI All Country World ex Canada Index ETF (XAW)

Alternatively, asset allocation ETFs also offer some exposure to emerging markets.