Double-Digit Returns, Single-Minded Focus: Revisiting Your Emerging Markets ETF

It’s been a great time to be an emerging markets equity ETF investor, but it may also be a great time to revisit your EM ETF. While this segment of the global equity market has delivered strong results again this year, rising concentration centered on the AI theme could mean an EM allocation isn’t delivering the diversification you might expect.Key Takeaways:  Strong 2026 gains in broad EM ETFs have been powered, in part, by the global AI boom, heavily concentrating returns in Taiwan, South Korea, and a few mega-cap tech stocks. EM ETFs are facing a loss of diversification as tech grows to roughly 40% of broad EM index weight, and single-stock concentration explodes. While EM stocks remain attractive due to higher projected earnings growth and a 45% valuation discount, investors needing real diversification should consider smart beta, exclusionary, or active EM strategies. The performance numbers look good. The MSCI Emerging Markets Investable Market Index (measured here by the performance of (IEMG A), which tracks it) has outpaced the S&P 500 this year (as measured by the results of SPYM), delivering strong double-digit gains in 2026.A lot of this upward momentum has been linked to the ongoing AI cycle where key emerging markets such as Taiwan and South Korea play an important supply role. These countries, home to some hardware giants such as TSMC, Samsung, and SK Hynix, have benefited from strong earnings results tied to boom in chips and hardware demand, helping drive EM ETFs higher. They have also, however, driven up segment concentration.Concentration an Issue in EM ETFs TooConsider that today, Taiwan and South Korea represent more than 45% of core emerging market equity index weights — such as the MSCI Emerging Markets Index underlying IEMG. Add China to the mix, and these three countries snag about 70% of the broad benchmark geographical exposure. What’s more, technology is the single largest sector allocation in this popular benchmark, representing about 40% of the index’s sector weights, and 25% of the portfolio is tied to just three tech names: TSMC, Samsung, and SK Hynix. A third of the benchmark sits in five stocks. Emerging markets have long been an investor favorite for portfolio diversification. Ironically, as we know, single-name and sector-concentration has been an ongoing concern in the U.S. equity market. Calls for diversification have been loud and persistent. Headed into the tail end of the third quarter, we are looking at broad EM benchmarks that are just as single-stock, single-sector and geographically narrowly focused. Concentration is now a growing concern across the emerging market equity universe, too. There’s no question that performance has been positive, and growth-focused investors have found exactly that in their broad emerging market ETF allocation. But diversification matters.You Told Us: EM For DiversificationAs an example, a recent advisor poll we ran at VettaFi (in a webcast with Pictet Asset Management) suggested that diversification remains a key driver of investor allocation to emerging markets. That makes the rising concentration we are seeing something to consider going forward.There are plenty of reasons to love emerging markets going into the rest of the year. For starters, there’s a significant valuation discount relative to the developed world. Despite strong gains so far in 2026, EM equities continue to trade at about a 45% discount to developed market equities on a price-to-book basis, and significantly below the forward P/E multiples of the S&P 500. That means emerging market stocks are offering a cozy margin of safety and room for relative multiple expansion. This segment of the equity universe if also projected to outpace developed markets in earnings growth going forward, partly due to the AI supply chain needs, but also due to demographic trends, ongoing structural growth, and strong domestic consumption across key markets such as India. When investing in emerging market equities ETFs, it remains crucial to be aware of what you are getting and what you may not be, especially if diversification is important.EM ETF Choices For Different Outcomes Consider a few ETFs as examples of different approaches to EM exposure. The world of EM equity ETFs is vast. These tickers singled out here simply offer a glimpse into the possibilities: 1. Go broad-based. There are several broad-based index-tracking EM ETFs, (IEMG A) being the largest with about $150 billion in assets. It tracks the MSCI EM Investable Market Index, offering broad, comprehensive exposure. (SPEM ) from State Street Investment Management is another popular example. 2. Go broad-based, but exclusionary. Even within broad EM strategies, key differences exist. Consider that one of the largest counterparts to IEMG, (VWO A) from Vanguard, tracks the FTSE Emerging Index, which is equally broad but excludes South Korea. Another exclusionary example includes (EMXC B+), which is a broad approach that strips out China entirely, or (XC ) from WisdomTree, which offers emerging market equities exposure ex-China, Korea and Taiwan. 3. Go smart beta. Another path to EM access is with an eye on factors and fundamentals. There are many unique strategies to consider. For example, (FNDE A) from Schwab, uses a fundamental index methodology that weights companies on metrics such as cash flow, adjusted sales, and dividends/buybacks rather than stock price. PXH from Invesco takes a similar approach relying on fundamental metrics to build the portfolio, delivering a value tilt. Another example is (FLQE B+) from Franklin Templeton, which uses a multi-factor screening model for quality, value, momentum, and low volatility, looking to reduce concentration risk and avoid value traps. 4. Go active. (AVEM ) from Avantis is a systematic active fund that overweights smaller, high-profitability, value-oriented companies while maintaining broad asset-class exposure. (JHEM B-) from JPMorgan is a high-conviction fundamental strategy leveraging a boots-on-the-ground analyst approach to determine areas of focus. Newcomer (RISE ), from Pictet Asset Management, is another example of a bottom-up research-driven active strategy. It delivers a unique focus on long-term demographics-driven growth, and excludes about 70% of the MSCI EM universe (China, South Korea and Taiwan) in a path to diversification.No One Choice Fits All and That’s OkHowever you access emerging markets, this is a segment of the global equity universe that remains compelling going into the latter part of the year, offering attractive valuations, strong growth potential and varying levels of diversification depending on your vehicle of choice. Like everything else, know what you own and why you own it. For a full list, check out our EM Equity ETF list on ETFDb.com. For more news, information, and strategy, visit ETFDB. VettaFi LLC (“VettaFi”) is the index provider for FNDE, for which it receives an index licensing fee. However, FNDE is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of FNDE.