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Across the global investment landscape, regional exchange-traded funds (ETFs) focused on emerging markets are seizing a rare moment of strength. As equity indices and bond yields align favorably, investors are finding strong equity performance in emerging markets that outpaces developed peers.
This article explores the key drivers underpinning this momentum—including macro trends, policy catalysts, sector dynamics, and risk considerations—while providing specific ETF examples, statistical insights, and practical guidance for portfolio constructors aiming to capitalize on these opportunities.
In the first quarter of 2025, the MSCI Emerging Markets IMI Index climbed approximately 1.7%, eclipsing many developed market benchmarks. This uptick reflects a confluence of factors that have reignited investor confidence.
China’s rebound has been a standout, led by a rally in its tech names. The offshore MSCI China index, particularly its China’s soft tech sector has rallied segment, surged 17% year-to-date. This outperformance has significantly contributed to broad market gains and ETF inflows.
Meanwhile, Brazil and select CEEMEA markets posted robust returns. Favorable commodity cycles and a more constructive macro environment helped these regions shrug off lingering global policy uncertainties.
India, despite occasional pullbacks from profit-taking, retains strong long-term catalysts. Its underlying domestic growth engines—demographic tailwinds, rapid digitization, and ongoing reforms—position it to draw substantial ETF inflows in the months ahead.
The Asia-Pacific ETF market has been a focal point for expansion. In 2024, assets under management in the region grew by 47%, driven in large part by Taiwan’s market, which exceeded NT$6.4 trillion.
Latin American ETFs have also recorded strong relative performance. Insulated from many US/EU trade tensions, these products benefitted from improving domestic fundamentals in Brazil and Mexico.
The economic backdrop is increasingly supportive. The growth differential between emerging and developed markets stands at EM–DM economic growth gap stands robust 2.5% in 2025, while EM earnings are expected to accelerate to 17%.
Central banks across many emerging economies are in easing cycles, which has bolstered capital inflows and stabilized local currencies. Concurrently, the US dollar index is down about 9% year-to-date, removing a significant headwind for EM equity performance.
Valuation metrics further enhance the appeal. The MSCI Emerging Markets Index trades at 12.4x forward earnings, roughly in line with its 25-year average, offering a MSCI EM trades at 12.4x forward earnings relative valuation advantage for patient investors.
Sector rotation has played a pivotal role in shaping performance across regional ETFs. In China, the soft tech segment—spanning software and services—has led the charge, while traditional hard tech names have seen mixed outcomes.
Commodities-focused products have thrived amid geopolitical tensions and supply disruptions. Gold ETFs surged over 25% in the first half of 2025, with silver and platinum funds also delivering outsized returns as investors sought safe-haven diversification.
Fixed income ETFs have attracted inflows as rates cooled. Products like VanEck J.P. Morgan EM Local Currency Bond (EMLC) and SPDR Bloomberg Emerging Markets Local Bond (EBND) illustrate how lower yields and stable fundamentals can propel bond ETF demand.
Newly proposed US reciprocal tariffs introduced early in 2025 injected volatility into export-oriented emerging markets, especially in Asia. However, domestic stimulus measures and strategic realignments have helped mitigate these headwinds.
Certain regions have displayed remarkable resilience. India’s robust internal consumption has offset export risks, while Latin American economies have largely sidestepped fresh trade frictions, maintaining investor confidence.
Regional ETFs in emerging markets can be powerful portfolio diversifiers, often moving independently of developed market trends. However, they carry distinct risk profiles that investors must understand.
Conversely, downturns in global growth, weaker commodity cycles, or spikes in geopolitical risk can trigger underperformance.
Despite these challenges, the active, thematic, and multi-asset ETF types emerging in this space offer investors innovative ways to target specific risks and opportunities.
Innovation in ETF product design will shape the next phase of growth. The proliferation of ETFs offering targeted thematic exposures—from digital infrastructure to green energy—allows investors to fine-tune regional allocations.
If geopolitical tensions remain elevated, central banks continue easing, and commodity demand stays resilient, record ETF inflows could persist into the second half of 2025. This environment may sustain the momentum that has made regional EM ETFs such compelling portfolio tools.
Investors seeking both growth potential and diversification benefit should carefully evaluate the specific risks and rewards of each regional ETF. By aligning exposures with broader macro themes and thematic trends, portfolios can capture upside while managing downside vulnerabilities. As the global investment landscape evolves, these dynamic instruments may continue to lead the charge in developing economies.
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