Emerging Markets Index Funds: Worth the Risk?
Emerging markets have delivered both spectacular decades and lost ones. The funds are cheap and diversified — the hard part is sizing the position and surviving the volatility.
Don't have time? Here's what you need to know:
- 1Emerging-markets funds are concentrated in a few economies — China is often the single largest country weight.
- 2VWO excludes South Korea (FTSE classification) while IEMG includes it (MSCI); both are cheap, while EEM costs far more.
- 3Emerging markets are ~10% of global market cap; many investors hold a high-single-digit to low-teens slice of equity.
- 4A broad international fund like VXUS already includes emerging markets, so a standalone fund is only for a deliberate overweight.
What Counts as an Emerging Market
"Emerging markets" is an index classification, not a vague vibe. Providers like MSCI and FTSE sort countries into developed, emerging and frontier tiers based on economic development, market accessibility and regulatory quality. The emerging tier is dominated by a handful of large economies: China, Taiwan, India, South Korea (in some indexes), Brazil and Saudi Arabia together make up the bulk of most emerging-market funds. China alone is often the single largest country weight.
That concentration matters more than the number of holdings. A fund like VWO may hold several thousand stocks, but if a quarter or more of the portfolio sits in Chinese companies, the fund's fate is heavily tied to one country's policy and politics. Reading the country-weight table on the fact sheet tells you more about your actual risk than the headline diversification count does.
The Three Big Funds: VWO, IEMG and EEM
Three ETFs dominate the category, and they differ in ways worth knowing. VWO (Vanguard) tracks a FTSE index that classifies South Korea as developed, so VWO excludes Korean stocks entirely. IEMG (iShares) tracks an MSCI index that still treats Korea as emerging, so it includes Samsung and other Korean giants. EEM is the older, more liquid iShares fund that institutions and traders favor, but it charges far more than IEMG for similar exposure.
For a long-term buy-and-hold investor, VWO and IEMG are the sensible defaults at single-digit-basis-point fees, and the Korea difference is the main thing distinguishing them. EEM's higher fee is justified only if you specifically need its trading depth — most individual investors do not.
| Fund | Issuer | Approx. expense ratio | Includes South Korea? | Best for |
|---|---|---|---|---|
| VWO | Vanguard | ~0.07-0.08% | No (FTSE: developed) | Low-cost buy-and-hold |
| IEMG | iShares | ~0.09% | Yes (MSCI: emerging) | Low-cost, broad coverage |
| EEM | iShares | ~0.70% | Yes (MSCI: emerging) | Traders needing liquidity |
Important: EEM and IEMG are both iShares emerging-market funds, but EEM costs roughly seven to eight times more. Don't buy EEM for a long-term hold by mistake.
The Case For — and Against — the Extra Risk
The bull case is straightforward: emerging economies tend to grow faster than developed ones, their stocks have often traded at lower valuations, and they don't move in perfect lockstep with U.S. markets, so a slice can improve a portfolio's diversification. There have been stretches — the 2000s in particular — when emerging markets dramatically outpaced the S&P 500.
The bear case is just as real. Emerging markets carry currency risk, political and governance risk, and the periodic gut-punch of a country-specific crisis. They have also endured long stretches of underperformance, including much of the 2010s, when U.S. stocks ran away from them. Volatility is meaningfully higher than developed markets, which means the position only helps if you actually hold it through the bad years rather than selling near the bottom.
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How Much Should You Actually Hold?
Emerging markets make up roughly 10% of global stock-market capitalization, so a globally neutral allocation would put about that much of your equity in them. Many investors hold somewhat less because of the volatility, and a common range for the emerging slice of a portfolio is in the high single digits to low teens as a percentage of total equity.
You rarely need a standalone emerging-markets fund at all if you own a broad international fund like VXUS, which already bundles developed and emerging markets together at a market-cap weight. Adding a dedicated VWO position on top makes sense mainly if you want to overweight emerging markets relative to that default — a deliberate tilt, not an accident.
Tip: If you already own VXUS, you already own emerging markets. Add a dedicated EM fund only when you specifically want to overweight the category.
Frequently Asked Questions
What is the difference between VWO, IEMG and EEM?
VWO follows a FTSE index that treats South Korea as developed, so it excludes Korean stocks; IEMG follows an MSCI index that still counts Korea as emerging and includes it. Both are cheap, single-digit-basis-point funds. EEM is the older iShares fund with deep trading liquidity but a far higher fee — better for traders than long-term holders.
How much of my portfolio should be in emerging markets?
Emerging markets are roughly 10% of global stock-market capitalization, so a globally neutral equity allocation is around that figure. Because of the higher volatility, many investors hold somewhat less — typically a high-single-digit to low-teens percentage of their stock allocation. If you own a broad international fund like VXUS, you already hold emerging markets without a separate fund.
Why is China such a large part of emerging-market funds?
Funds weight companies by market capitalization, and Chinese companies make up a large share of the emerging-market universe — often the single biggest country weight. That means a typical emerging-market index fund is significantly exposed to Chinese policy, regulation and politics, which is the main concentration risk to check on the fact sheet.
Have emerging markets outperformed U.S. stocks?
It depends entirely on the period. Emerging markets dramatically outpaced U.S. stocks through much of the 2000s, then badly lagged them through much of the 2010s. Over very long horizons the returns have been broadly comparable but with much higher volatility, which is why the case for holding them rests on diversification rather than a promise of higher returns.
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Alex Harrington
CFA Level II Candidate, Finance & Economics
Alex Harrington is an independent ETF researcher and personal finance writer with over 8 years of experience analyzing exchange-traded funds. A CFA Level II candidate with a background in economics, Alex has reviewed 800+ ETFs and helped thousands of beginners build their first investment portfolios through clear, jargon-free education.
This content is for educational purposes only and does not constitute financial advice. Past performance does not guarantee future results. Consult a licensed financial advisor before making investment decisions.