ETFs Capturing Emerging Market Gains

ETFs Capturing Emerging Market Gains

Two trends make for interesting opportunities in EM ETF investing right now.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

Investors love a winning market segment, and emerging markets—perhaps surprisingly—suddenly fit that bill, not that anyone has cared too much about it.

Since the U.S. stock market hit a low on March 23, broad emerging market ETFs have picked up momentum, retracing oversold conditions and rising to new highs. The iShares Core MSCI Emerging Markets ETF (IEMG) and the Vanguard FTSE Emerging Markets ETF (VWO) have now matched the massive run-up of the S&P 500 ETF Trust (SPY) in that time window:



Asset Creations Lagging
U.S. investors, however, have not really bought into this ride. Some have even called this the most under-owned and unloved rally we’ve seen in recent times.  

IEMG has bled more than $4.3 billion in net redemptions since March 23; VWO has lost about $3.2 billion in net outflows; and the iShares MSCI Emerging Markets ETF (EEM) has seen some $630 million in net redemptions.

History Not Your Friend
The skepticism over whether this latest bout of strength has any legs isn’t surprising given recent history.

“Over the last 10 years through the end of March, the MSCI Emerging Market Index barely squeezed out a 0.68% annual return versus the S&P 500, which returned nearly 11% a year,” Ben Doty, senior investment director at Koss Olinger, said.

Sliced another way, going back to the March 2009 financial crisis low to earlier this month, SPY rallied almost 490%, while the MSCI EM Index was up less than 200%, KraneShares’ CEO Brendan Ahern notes.

“That enormous disconnect is due to close at some point,” Doty said, arguing the recent run-up is partly fueled by relative value in the space.

But Ahern offered the sobering reminder that, “if you look historically, the more diversified away from the U.S. you’ve been, the more you’ve underperformed.” It’s no wonder investors continue to have really strong home bias, and really strong skepticism toward emerging markets.

2 Key Winning Trends
That said, this recent uptick in EM performance highlights two interesting trends in this space:

  1. Country exposure has made all the difference. China (and more broadly, Asia) is largely leading this move higher.
  2. Sectors have mattered more than ever. It’s high-growth names—mostly in technology—that have pushed performance higher.

It makes sense, then, that broad EM ETFs are lagging—and bleeding assets—relative to some narrower strategies accessing some of these leading pockets of performance.

What To Consider: Asia
China is the best-performing stock market globally this year, despite COVID, trade tensions and domestic disputes with Hong Kong. Other Asian economies, including Taiwan, Malaysia and South Korea, are also among top performers.

“The bigger story lies in Asia,” Forstrong CIO Tyler Mordy explained. “Consider all the positives: Asia’s handling of this year’s health crisis has been far better than any other region in the world. Asia’s fiscal and monetary policy response has been reasonable relative to the bazooka most Western countries pulled out to combat the crisis—there’s still spare ammo and plenty of room for policy easing.

“And Asian stock markets do sport much lower valuations than their developed counterparts,” he added.

What’s more, low oil prices and a weakening U.S. dollar are also beneficial for many Asian economies, which are big commodity importers, he adds.

“Of course, Asian companies remain vulnerable to a fragile global growth environment,” Mordy said. “However, it would not be the first time that the above confluence of conditions created a lasting bull market in Asian stocks. We fully expect this time will not be different.”

China-focused equity ETFs—funds such as the Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR), the iShares MSCI China ETF (MCHI) and the KraneShares Bosera MSCI China A Share ETF (KBA)—have outperformed broader strategies (like EEM) as well as SPY year to date:



There are 48 ETFs in the market focused on China, and a number of single-country funds accessing different Asian nations. China and Asia also feature prominently in broader market strategies:

  • IEMG is 36% allocated to China/Hong Kong, at least 65% tied to Asia (12% to South Korea, which is a big differentiator to VWO).
  • VWO, too, has about 65% in Asia, but a bigger allocation to China (42%), Thailand and Malaysia, as it excludes South Korea.

But If China Worries You …
These days there’s a lot of concern centered on China. Whether you doubt the accuracy of China’s economic data, or worry about the country’s governance and ongoing trade disputes, there are ways to capture this Asia-centered rally by excluding China.

“China is always the elephant in the EM room, because it’s approximately 40% of most EM ETFs,” Life & Liberty Indexes founder Perth Tolle said. “In China, all companies, public and private, can be used as tools anytime for social control at the whim of the state. Information is not transparent or reliable, and prices don’t reflect economic value; they reflect speculation driven by state signals.

“Now, China’s government is pumping up their market again,” Tolle said. “Investors should be aware of the heightened risks in an artificially run-up market dominated by speculators responding to the signals of a fragile state. In any market, people are the engines of growth.”




Excluding China
The Freedom 100 Emerging Market ETF (FRDM) offers broad emerging market exposure but excludes countries where liberty isn’t valued. Factors that impact country and stock selection in this portfolio include rule of law, absence of terrorism and human trafficking, due process, freedom of the press, as well as tax burden, access to international trade, regulations, and size of government.

Notably, FRDM excludes China, as well as other countries such as Brazil. But the fund offers ample access to some of the countries many expect to benefit most from the ongoing global push to diversify the supply chain away from China—countries like Taiwan, South Korea, Indonesia and India, according to Tolle.

The iShares MSCI Emerging Markets ex China ETF (EMXC) is another example of EM exposure ex-China in an ETF wrapper. EMXC covers about 85% of the EM market-cap universe, but excludes the region’s biggest economy, China.

These funds have delivered stellar performance, especially since the March 23 market low—FRDM has in fact outperformed broader strategies such as EEM and VWO:



What To Consider: Sectors
Outside of country exposure, sector exposure has been hugely important this year. It’s been all about high-growth tech.

If you are tracking the MSCI EM Index (underlying EEM and IEMG), roughly half of your exposure is in value-y, slower-growth sectors like financials, energy, utilities and industrials. That fact has boosted the case for sector-specific or thematic funds this year.

Some of the tickers delivering impressive gains this year by capturing the strength in technology and consumer trends include the Emerging Markets Internet & Ecommerce ETF (EMQQ), and the KraneShares Emerging Markets Consumer Technology Index ETF (KEMQ), as well as a leveraged play such as the Direxion Daily CSI China Internet Index Bull 2X Shares (CWEB).


Charts courtesy of


EMQQ has been a standout fund, delivering consistently strong gains by focusing on internet and e-commerce in emerging markets. The portfolio, with some 85 holdings and nearly 60% of the portfolio tied to China and Hong Kong companies, has been steadily gathering assets, nearing $850 million. Year to date, EMQQ has attracted more than $170 million in net creations.

Almost 83% of EMQQ is tied to internet services names—a segment of the equity market that has been growing rapidly.

Similarly, KEMQ focuses on tech names linked to e-commerce, internet, software and e-payments. But the fund is only 37% tied to China and Hong Kong, and only about 50% tied to internet services. That makes it a slightly more diversified mix, which in 2020 has delivered strong gains, but lagging EMQQ. Still, year to date, investors have poured about $100 million into the fund, which is now a $130 million ETF.

And for those looking to combine the China play with the tech story, the KraneShares CSI China Internet ETF (KWEB) invests in overseas-listed Chinese internet companies, focusing on software and internet service providers. Or for a stronger short-term punch, the CWEB tracks the same index underlying KWEB, but delivers 2x the daily returns. (Just remember that with leverage ETFs, compounding poses a real risk to longer-term allocations.)

Myriad Ways To Access EM
Whether you are looking to access emerging markets via broad strategies, country- and region-specific plays or through narrower sectors and themes, there are plenty of tools at your disposal. Here’s how can help:

  • For a complete list of the 212 emerging market ETFs on the market today, check out our Emerging Market ETF Channel.
  • To compare any two funds side-by-side, check out our ETF Comparison Tool.
  • To find funds that offer access to specific companies you’re looking for—say, Alibaba or Tencent—check out our ETF Stock Finder tool.
  • And to keep a close eye on all your favorite EM ETFs, create your own list with our ETF Watchlist tool.

Contact Cinthia Murphy at [email protected]

Cinthia Murphy is head of digital experience, advocating for the user in all that does. She previously served as managing editor and writer for, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.