Stocks listed in emerging markets such as South Korea, South Africa, Mexico, Brazil, Russia, India and China have a place in your portfolio because of their higher risk / reward profile and lower correlations to developed markets equities (though markets are becoming more correlated). The MSCI Emerging Markets index tracks the performance of equities listed in 26 emerging markets weighted according to their float-adjusted market capitalization.

There are two ETFs that track the emerging markets index: the older and more-popular iShares MSCI Emerging Markets Index Fund (Ticker EEM) and the upstart competitor from Vanguard Emerging Markets ETF (Ticket VWO). Since both ETFs track the same index, long-term investors would prefer the cheaper option. VWO charges a MER of 0.30% less than half that of EEM (MER is 0.75%). There is a bit of confusion about the composition of VWO. When it was first introduced, VWO did not provide exposure to important markets such as Russia but since last fall, VWO is essentially the same as EEM.

Any mention of emerging markets should include a discussion of the red-hot economies of India and China. Investors can already get a 17% exposure to these nations with either the EEM or VWO and any overexposure through specialized country ETFs or the new-fangled BRIC funds (such as the Claymore BRIC ETF – Ticker CBQ) is overkill (and chasing recent performance).

See Also: Investing in Emerging Markets