Emerging market stocks are off to their fastest relative outperformance ever, so far in 2026.
The cycle of interest in emerging markets waxes and wanes. Due to its performance in 2025, it is back in the spotlight and headlines. Emerging market (EM) equities are building on momentum from 2025, when they were up 33% – more than double the returns of the S&P 500.
There are multiple reasons for this surge, which is moving into a higher gear so far this year.
A weaker U.S. dollar is one driver, tariffs leading to more regionally integrated economic growth is another. Under pressure from President Trump’s tariffs, countries around the world are rushing into new trade deals, such as India recently signing deals with South Korea, Canada, Brazil, and the European Union.
In addition, emerging market earnings are accelerating. Despite impressive gains, EM stocks still offer investors lower valuations relative to U.S. markets. Finally, tech-heavy Asian markets, and stronger economic growth, are all winds at the back of emerging markets.
[text_ad]
Emerging Market ETFs Are One Way to Play It
Exchange-traded funds (ETFs) are also being launched hand over fist, and there are now more publicly traded ETFs than stocks. Morningstar reports that investment firms launched 997 new actively managed ETFs in the U.S. last year, nearly triple the average of the previous five years.
Many investors automatically reach for a broad emerging market ETF such as the iShares MSCI Emerging Market ETF (EEM). The Cabot Explorer goes a step further to screen stocks for higher-quality companies by dividend yields with the WisdomTree Emerging Markets High Dividend Fund (DEM).
This is just a start since the emerging markets moniker is, in many ways, an outdated concept.
It was first used by Antoine van Agtmael, an economist at the International Finance Corporation (IFC), a division of the World Bank, in 1981 as a more acceptable term than “Third World” economy. Wall Street quickly adopted it as a good marketing term, highlighting higher growth prospects in these markets.
Investors in the iShares MSCI Emerging Market ETF (EEM) may think they are getting exposure to a wide variety of markets, but 45% of their money is going to China and Taiwan. Add South Korea and India, and you get to almost 75%.
But the collection of countries in the emerging basket varies widely, including Vietnam, Brazil, Mexico, South Africa, Indonesia, Russia, Saudi Arabia, and Malaysia. That is why my mantra when speaking about investing in emerging markets is “look under the hood” to see what you are buying. This goes for investing in ETFs or specific stocks.
For example, the iShares MSCI South Korea ETF (EWY) currently has 93 positions. That sounds well diversified, but when you look at the holdings, you’ll see that EWY has two holdings comprising 47% of this ETF’s assets. Very few investors realize this tremendous concentration. Those companies are Samsung and SK Hynix. This has been great as this ETF soared in 2025 and it is difficult to invest directly in Samsung without access to the Korean stock exchange.
The Vanguard FTSE Emerging Markets ETF (VWO) is one of the largest, low-cost (only 0.07% expense ratio) funds tracking over 5,000 stocks in emerging economies.
Country-specific ETFs are a creative way of building a portfolio and learning more about specific markets. The iShares MSCI India ETF (INDA) is getting a lot of attention as India’s GDP is forecast to grow 6.9% in 2026 as AI hyperscalers build out data centers.
ETFs are pushing the envelope of risk, so I advise some caution. There are now about 400 single-stock ETFs trading on the market. The highly risky funds use strategies to produce a target of double or triple the daily return of an underlying stock.
...But There’s a Better Way
Emerging market stocks are still the best way to zero in on opportunities.
This week, the Cabot Explorer will recommend a South Korean stock trading at a deep discount despite double-digit revenue growth. Join the Cabot Explorer today so you don’t miss this opportunity.
[author_ad]