Emerging Markets: High-Growth Investing in Developing Economies

Major Emerging Markets

China makes up approximately 30% of the MSCI Emerging Markets Index. The economy is dominated by manufacturing, technology (Tencent, Alibaba, Meituan), consumer goods, and financials. China is the largest emerging market by market capitalization but comes with significant state influence and regulatory risk, as seen in the 2021 technology sector crackdown.

India represents about 15% of the EM index. Key sectors include technology services (Infosys, TCS), financials, and consumer goods. India is the fastest-growing major economy with a more democratic and market-friendly environment than China. It has a young population and a rapidly expanding digital economy.

Taiwan makes up roughly 15% of the index, heavily concentrated in semiconductors through TSMC, one of the world's most important companies. Taiwan is technologically advanced but geopolitically sensitive given its relationship with China.

Brazil accounts for 5-7% of the EM index, driven by commodities, energy (Petrobras), and financials (Itau Unibanco). Its economy is heavily dependent on the commodity cycle and tends to perform well when commodity prices are rising.

South Korea makes up about 12% of the index with technology (Samsung, SK Hynix) and autos (Hyundai, Kia). South Korea is sometimes classified as developed by some index providers and emerging by others, reflecting its advanced economy but with unique governance and geopolitical risks.

Smaller emerging markets include Mexico, Indonesia, South Africa, Saudi Arabia, Turkey, Thailand, Malaysia, the Philippines, and Vietnam — each with its own sector composition, growth drivers, and risk profile. Diversify globally with international investing →

How to Invest in Emerging Markets

Broad emerging market ETFs: VWO (Vanguard FTSE Emerging Markets ETF, 0.08% expense ratio) and IEMG (iShares Core MSCI Emerging Markets ETF, 0.09%) offer broad exposure to the entire emerging market asset class. These are the most cost-effective options for most investors. VWO tracks the FTSE index and has slightly less China exposure. IEMG tracks the MSCI index and follows the standard emerging market classification.

Country-specific ETFs: For investors who want targeted exposure, country ETFs provide concentrated bets. MCHI (iShares China Large-Cap) and FXI (China 50) cover Chinese equities. INDA (iShares India 50) and PIN (Invesco India) cover India. EWZ (iShares Brazil) covers Brazilian stocks. EWW (iShares Mexico) covers Mexico. Country ETFs allow you to overweight specific markets you are bullish on, but come with higher concentration risk.

Factor and thematic EM ETFs: EEMS (iShares MSCI Emerging Markets Small Cap) targets smaller companies that may benefit more from domestic growth. DEM (WisdomTree Emerging Markets High Dividend) focuses on dividend-paying EM stocks. EMXC (iShares MSCI Emerging Markets ex China) excludes China for investors who want to avoid China-specific risks. SCHE (Schwab Emerging Markets Equity ETF) is a low-cost alternative at 0.11% ER. Master index fund investing first →

Risks of Emerging Market Investing

Currency risk: This is often the largest risk in emerging market investing. Local currencies can depreciate significantly against the US dollar, wiping out stock market gains. A 10% stock market gain in Indian rupees could become a loss in US dollars if the rupee weakens 15% against the dollar. A strong US dollar environment is typically negative for emerging market returns.

Political risk: Government interference, corruption, expropriation, and sudden regulatory changes can destroy shareholder value. China's 2021 tech crackdown wiped hundreds of billions from Chinese tech stocks. Russia's invasion of Ukraine led to a complete loss of access for foreign investors in Russian stocks. Government policy changes in Turkey, Brazil, and Argentina have periodically roiled their markets.

Liquidity risk: Some emerging market stocks and ETFs have lower trading volumes than developed market equivalents, leading to wider bid-ask spreads and potential difficulty executing large trades at favorable prices. This is more pronounced in smaller emerging markets and small-cap EM stocks.

Governance risk: Weaker shareholder protections, less transparent accounting standards, and different corporate governance norms can make it harder to assess the true value of EM companies. Insider trading and market manipulation may be more common in some markets.

Geopolitical risk: Tensions in the Taiwan Strait, China-India border disputes, the Russia-Ukraine war, and instability in the Middle East all affect emerging market investments. These risks are difficult to predict and can lead to sudden, sharp declines. Learn how to allocate to EM in your portfolio →

Portfolio Allocation

The appropriate allocation to emerging markets depends on your investment philosophy and risk tolerance. A market-cap-weight approach would suggest allocating roughly 25% of your stock portfolio to emerging markets, since EM makes up about 25% of global stock market capitalization. However, many financial advisors recommend a smaller allocation of 10-20% of stocks to EM, partly because of the higher risks and partly because many US-based investors are already heavily exposed to the US economy through their jobs, homes, and currency. A common three-fund portfolio might allocate 60% US stocks, 30% international developed stocks, and 10% emerging market stocks. More aggressive investors may allocate up to 25% of stocks to EM. Build a three-fund portfolio with EM exposure →

Historical Performance

Emerging markets have delivered strong returns over long periods but with much higher volatility than developed markets. $15,000 invested in VWO in 2005 grew to approximately $45,000 by 2025, a 3x return. The same $15,000 invested in VTI (US total stock market) grew to about $70,000, a 4.7x return. US stocks significantly outperformed EM over this period. However, from 2000 to 2009, emerging markets returned approximately 8% annualized while US stocks returned -1% annualized. EM tends to outperform in different decades — the 2000s were the EM decade, the 2010s were the US decade. The diversification benefit of holding EM is real, even if it underperforms for extended periods. Calendar years vary wildly between EM and US outperformance.

Are emerging markets a good investment?

Emerging markets are a good investment for long-term investors who want diversification and exposure to higher growth economies. EM stocks have lower correlation with US stocks than developed international stocks, providing genuine diversification benefits. Over very long periods (20+ years), EM and US stocks have delivered similar total returns, though with much higher volatility for EM. The key is to hold EM as part of a diversified portfolio and not try to time when EM will outperform. For investors with a 10+ year horizon, a 10-20% allocation to EM is reasonable. Short-term investors should avoid EM due to high volatility.

What is the best emerging markets ETF?

For most investors, VWO (Vanguard FTSE Emerging Markets, 0.08% ER) or IEMG (iShares Core MSCI Emerging Markets, 0.09% ER) are the best choices. Both offer broad diversification across emerging markets at very low costs. VWO tracks the FTSE index and has slightly less China exposure and more Taiwan and South Korea. IEMG tracks the MSCI index and is more China-heavy. For tax-advantaged accounts, either works. For taxable accounts, VWO may be slightly more tax-efficient. If you want to exclude China for geopolitical reasons, consider EMXC (iShares MSCI EM ex China). If you want an even lower expense ratio, SCHE (Schwab EM Equity, 0.11%) is another solid option.

What are the risks of emerging market investing?

The main risks are currency risk (local currency depreciation vs USD), political risk (government interference, corruption, regulatory changes), liquidity risk (wider spreads, harder to trade), governance risk (weaker shareholder protections, less transparent accounting), and geopolitical risk (conflicts, trade disputes). Currency risk is often the largest — a strong dollar environment is typically negative for EM returns. Political risk can be sudden and severe, as seen in China's tech crackdown or Russia's invasion of Ukraine. Diversification across many EM countries reduces but does not eliminate these risks. The higher expected returns of EM compensate for these additional risks.

How much of my portfolio should be in emerging markets?

A common recommendation is 10-20% of your stock portfolio in emerging markets. Market-cap-weight proponents would argue for 25% (EM's share of global market cap). Conservative investors may prefer 5-10%. Aggressive investors may go up to 25-30%. Your allocation should consider your risk tolerance, investment horizon, and overall portfolio. If you already have significant exposure to US multinational companies (which derive substantial revenue from emerging markets), you may need less direct EM exposure. A 10-15% allocation is a sensible starting point for most investors. Rebalance periodically to maintain your target allocation.

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