Emerging Markets ETFs: A Gateway to Growing Economies

Emerging markets ETFs offer a gateway to some of the fastest-growing economies in the world but also some of the most volatile. These funds bundle dozens or even hundreds of stocks from developing countries into a single investment vehicle, giving investors broad exposure to places like China, India, Brazil and beyond.

They’ve long been seen as a way to tap into higher growth potential than what’s typically available in developed markets like the U.S., Europe or Japan. But, over the years, they’ve also tested the patience of investors, with stretches of underperformance, political instability, currency devaluation and headline risk.

So how should you think about emerging markets in 2025? And what role do emerging markets ETFs play in a portfolio? This guide breaks it all down.

What Are Emerging Markets?

Emerging markets are countries that are in the process of moving from low-income, less-developed status to a more industrialized, modern economy. They typically have:

• Faster GDP growth than developed economies
• Expanding middle classes and urban populations
• Less mature capital markets and legal systems
• Higher volatility and risk 

This group includes major economies like China and India, as well as smaller nations like Vietnam, Egypt and Peru. While there’s no universally accepted definition, index providers like MSCI and FTSE group countries into emerging, developed and frontier markets based on metrics like market size, market accessibility and economic development.

Why Invest in Emerging Markets?

1. Long-Term Growth Potential

One core thesis for investing in emerging markets is that faster economic growth should translate into faster earnings growth and, eventually, stronger stock market returns. These are countries where industrialization is still underway, infrastructure is being built and consumer demand is rising.

2. Demographics and Consumption Trends

Many emerging markets have younger populations than developed nations. As these populations enter the workforce and earn more money, their spending tends to rise. That demand can create tailwinds for local businesses.

3. Diversification

Because emerging markets often behave differently from the U.S. and other developed markets, they can help diversify a portfolio. They don’t always move in sync with the S&P 500 or developed international stocks, which means adding them to a portfolio can potentially reduce overall volatility.

Key Risks of Emerging Markets Investing

1. Political and Regulatory Risk

Changes in government, weak institutions, corruption and policy unpredictability are common risks in developing economies. A country may nationalize industries, impose capital controls or change tax policy with little warning. That can wreak havoc on foreign investors and company earnings.

2. Currency Risk

Emerging markets often face currency volatility. If you own stocks in, say, Brazil, and the Brazilian real weakens against the U.S. dollar, your returns could get wiped out even if the local stock market goes up. Many EM ETFs do not hedge currency exposure, so this is a real source of risk.

3. Corporate Governance and Transparency

Accounting standards, disclosure practices and shareholder protections vary widely. Some companies may lack the same governance standards you’d expect in developed markets, and investors might be exposed to fraud, mismanagement or state interference.

4. Volatility and Liquidity

Emerging markets can experience sharp swings in investor sentiment. They tend to sell off quickly during times of global stress. Some markets also have lower liquidity, making it harder for large investors to enter or exit positions.

How Emerging Markets ETFs Work

Emerging markets ETFs track indexes that represent a basket of stocks from emerging economies. These indexes can be broad or targeted.

The most common broad-based EM ETFs track indexes like:

• MSCI Emerging Markets Index: Covers large- and mid-cap companies across over 20 countries
• FTSE Emerging Index: Similar coverage with slightly different country weightings and classifications

Some ETFs follow more specific themes, such as:

• Single-country ETFs (China, India, Brazil)
• Regional ETFs (Latin America, Asia ex-Japan)
• Small-cap or value-tilted EM ETFs
• Currency-hedged or dividend-focused EM ETFs

Most of these funds are passively managed, but there are a growing number of actively managed EM ETFs that try to outperform benchmarks through security selection or dynamic country weighting.

Key Factors to Consider When Choosing an EM ETF

1. Country Exposure

Not all emerging markets ETFs are created equal. Some funds are heavily concentrated in a few countries. For example, broad EM indexes have often had outsized exposure to China and Taiwan, sometimes making up more than 50% of total weight.

If you're looking for more balance or less exposure to a particular country, you may want to consider:

• Funds that cap country weights
• Region-specific ETFs
• Active funds that manage exposures differently

2. Sector Composition

Emerging markets tend to have different sector weightings than developed markets. In some countries, state-owned enterprises in energy or telecom play a large role. Look under the hood of an ETF to see if it aligns with your sector preferences. 

3. Currency Exposure

Most EM ETFs are unhedged, meaning you’re taking on foreign exchange risk by default. If you’re worried about a particular currency weakening, that could be a reason to limit exposure or consider a currency-hedged fund (though these are rarer in EM).

4. Costs

Expense ratios for EM ETFs vary, just like with U.S. or developed international ETFs. Broad index-based EM ETFs may cost as little as five to 10 basis points, while more niche or active strategies can run 50-100 basis points or more.

Popular Emerging Markets ETFs

Here’s a look at some of the most widely used emerging markets ETFs in the U.S. market.

Broad-Based

• iShares MSCI Emerging Markets ETF (EEM): One of the oldest and most liquid EM ETFs but expensive
• Vanguard FTSE Emerging Markets ETF (VWO): Much lower cost, similar coverage, but tracks the FTSE index instead of MSCI
• iShares Core MSCI Emerging Markets ETF (IEMG): Tracks the MSCI EM IMI index, including small-caps; Popular for broader exposure

Regional/Country-Specific

• iShares MSCI China ETF (MCHI): Pure play on China’s large- and mid-cap equities
• iShares MSCI India ETF (INDA): Exposure to one of the fastest-growing large economies
• iShares Latin America 40 ETF (ILF): Regional exposure to Brazil, Mexico, Chile and others

Role in a Portfolio

So, how much should you allocate to emerging markets? There’s no single right answer; it depends on your goals, risk tolerance and time horizon.

Some investors stick to global market-cap weights; others go underweight due to the volatility and headline risk; and a few go overweight, making a bet that EMs are undervalued and poised for a comeback.

Keep in mind that EM equities are more volatile than U.S. or developed international stocks, and that they can go through long periods of underperformance.

But over very long time horizons, they could potentially add diversification and return potential.

Final Thoughts

Emerging markets ETFs offer exposure to some of the most dynamic—and chaotic—corners of the global economy. The case for investing is rooted in long-term growth, demographics and diversification. But the risks are real: political turmoil, shaky governance and painful drawdowns are part of the package.

Investors who want a smoother ride might stick with broad, low-cost ETFs that spread risk across multiple countries and sectors. Those with stronger convictions can explore regional or thematic strategies to express a specific view.

Like any investment, the key is knowing what you own, why you own it and how it fits into your overall plan. Emerging markets may not always behave, but for the patient and well-diversified investor, they can be an important part of the global equity puzzle.