Emerging Markets ETFs Outperform, Driven by AI, Valuations

The MSCI Emerging Markets index surged over 30% in U.S. dollar terms in 2025, easily surpassing the S&P 500 and other developed market benchmarks. This strong performance is attributed to robust growth drivers in Asia, particularly China (with roughly a 30% weighting), South Korea (nearly 100% USD gain), and Taiwan (40% USD gain), all benefiting from the global AI boom.

India, despite underperforming in 2025 with a 9% return, is slated for a rebound in 2026 as earnings stabilize. Investors are also drawn to EM for diversification from top-heavy U.S. markets, attractive valuations (trading at roughly 15 times forward earnings compared to the S&P 500's 22-23 times), and potential dollar hedging benefits from a weakening U.S. dollar.

Broad EM ETFs like the iShares Core MSCI Emerging Markets ETF (IEMG) attracted $18 billion in net inflows, and the Vanguard FTSE Emerging Markets ETF (VWO) saw $8.5 billion. Actively managed funds such as the Avantis Emerging Markets Equity ETF (AVEM) brought in $6 billion, while smart beta strategies like the Goldman Sachs ActiveBeta Emerging Markets Equity ETF (GEM) also gained traction, crossing $1 billion in assets.