Why 2026 Could Be Your Time to Level Up Into Emerging Market ETFs

The case for emerging market exposure just got stronger. After delivering roughly 26% in returns throughout 2025 despite geopolitical headwinds and trade uncertainty, emerging markets are signaling they’re far from finished. Investor sentiment has flipped dramatically—according to HSBC research, emerging market pessimism has evaporated, with net sentiment hitting record levels. The Dow Jones Emerging Markets Index gained 18.64% year to date, handily beating the S&P 500’s 15.19% return. Meanwhile, equity funds tracking these opportunities pulled in $2.78 billion in just one week through December 10, marking seven consecutive weeks of inflows.

The Diversification Case Gets Harder to Ignore

Here’s the uncomfortable truth for concentrated U.S. equity investors: the S&P 500 isn’t as diversified as many believe. Nearly 35% of the index is allocated to information technology, with outsized exposure to the “Magnificent 7” mega-cap tech names. As markets debate whether AI-driven valuations have gotten ahead of themselves, portfolio concentration risk is becoming harder to ignore.

Spreading exposure beyond the U.S. isn’t just about chasing returns—it’s about building resilience. Emerging market funds provide geographic diversification that can cushion against potential downside if the tech-heavy rally stumbles. This rebalancing impulse is real: investors are actively moving capital into emerging market funds to reduce their technology sector exposure and strengthen long-term risk-adjusted returns.

Three Tailwinds Pushing Emerging Markets Higher

Weakening Dollar Makes Foreign Equities More Attractive

The U.S. Dollar Index (DXY) has fallen 0.90% over the past month and 9.07% year to date, hitting an all-time decline of 17.69%. A weaker greenback means emerging market returns become more valuable when converted back into dollars—a structural boost to international equity performance.

Fed Rate Cuts Still in Play

Markets are pricing in a 25.5% probability that the Federal Reserve will cut rates to the 3.25-3.5% range by January 2026, up from just 15.3% a month ago. Each Fed rate cut makes the U.S. dollar less attractive to foreign investors, further amplifying the emerging market appeal. Meanwhile, lower U.S. rates make higher-yielding emerging market assets look increasingly compelling.

Fundamental Improvements Across Emerging Economies

According to Morgan Stanley strategists, emerging market fundamentals are actually strengthening. Sovereign credit quality is improving year after year, reducing default risk and making emerging market bonds increasingly attractive. Bond funds saw $68 million in inflows in the week ending December 10, signaling institutional demand for this opportunity.

Emerging Market Equity ETFs Worth Considering

For broad-based emerging market equity exposure, investors can examine iShares Core MSCI Emerging Markets ETF (IEMG), Vanguard FTSE Emerging Markets ETF (VWO), iShares MSCI Emerging Markets ETF (EEM), SPDR Portfolio Emerging Markets ETF (SPEM), and Avantis Emerging Markets Equity ETF (AVEM). Each offers different factor tilts and geographic weightings, allowing for customized emerging market positioning.

Don’t Overlook Emerging Market Bonds

Fixed income investors should consider iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB), Vanguard Emerging Markets Government Bond ETF (VWOB), Invesco Emerging Markets Sovereign Debt ETF (PCY), and Global X Emerging Markets Bond ETF (EMBD). With improving sovereign fundamentals and Fed rate cut expectations creating a friendlier environment for emerging market debt, bond funds are seeing renewed institutional interest.

The Bottom Line

The convergence of a weakening dollar, dovish Federal Reserve expectations, and improving emerging market fundamentals creates a compelling setup to level up your portfolio exposure. After years of underperformance relative to U.S. mega-cap tech, emerging markets are recapturing investor attention for legitimate structural reasons—not just sentiment swings.