Young & Invested: Emerging markets are outperforming. Is this the best ETF to gain exposure?
After years of lagging US equities, emerging markets are staging a comeback. But not all ETFs are created equal.
Mentioned: Vanguard FTSE Emerging Markets Shrs ETF (VGE)
Welcome to my column, Young & Invested, where I discuss personal finance and investing for Gen Z and Millennials.
This column aims to be a resource for young investors navigating an ever changing financial, political and social landscape as they try to build wealth. Tune in every Thursday for the latest edition.
Edition 71
Emerging market stocks have had quite the 12 months.
The MSCI Emerging Market Index has returned 40% over the past year, dwarfing the S&P 500 at 20% and the MSCI World Index at 21%.
This marks a meaningful resurgence after years of lagging developed equities. And naturally, where performance emerges, investors follow.
Readers familiar with my column will already be accquainted with my thoughts on chasing performance, so I’ll spare the lecture. In short, performance tables aren’t a shopping list for a viable future investment strategy.
Extrapolating past performance leaves us in danger of recency bias aka the tendency to believe that what just happened will continue to happen. In this case, it’s picking investments assuming that the recent winners will keep winning.
That doesn’t mean looking at performance is an arbitrary exercise. The real question isn’t what is winning this year, but whether the drivers of further growth persist.
What is driving the recent strength?
Market consensus suggests the investment case now goes beyond momentum. Many believe there has been a genuine shift in the conditions that helped developed markets to dominate emerging markets for over a decade.
The first point is on the strength of the US dollar over the last 15 years. This has been a major headwind for emerging market (EM) equities, because many of these economies borrow and trade in US dollars. Thus it becomes more expensive when the dollar strengthens.
After increased aggressiveness in US trade policy, that cycle now appears to be turning and eroding confidence in dollar-denominated assets. This could potentially trigger the first sustained dollar downcycle since the early 2000s. These tend to last close to 20 years, meaning this shift, if proven, represents a tailwind for investors with unhedged exposure.
Another point is on the relative valuation of EM equities vs the US. History shows that when EM valuations have been in the top quintile of cheapness relative to US equities, EM stocks have on average outperformed US equities by more than 50% over the subsequent five-year period.
Earnings is another driver, after EM corporate profits bottomed in 2023 but have recovered steadily since. Cumulative earnings-per-share growth of around 40% has been forecast for 2026 and 2027. The hypothesis is this earnings growth will translate into stock price appreciation.
Lastly, it seems like no investment conversation is complete without mentioning AI. EMs play an important role at the heart of the global AI value chain. Whilst the narrative so far has been dominated by US mega-caps, some argue that a cluster of companies across Taiwan, China, and South Korea have become indispensable to the AI build-out.
Recent positive earnings-per-share revisions in Taiwan and South Korea are among the clearest evidence that earnings growth is broadening beyond US mega-caps.
Vanguard FTSE Emerging Markets Shares ETF VGE
- Total Cost Ratio (prospective): 0.48% p.a.
- Assets Under Management: AUD 2 billion (30 June 2026)
- Morningstar Medalist Rating: Bronze
- Morningstar Category: Australia Fund Equity Emerging Markets
- Morningstar Category Index: MSCI Emerging Markets Net Total Return Index
A quick breakdown
VGE tracks the FTSE Emerging Markets All Cap China A Inclusion Index. This includes large, mid and small cap stocks from more than 20 emerging economies.
It uses a market cap weighted approach which essentially reflects the market’s collective opinion of each stock’s value. It sorts the broader cohort and holds those that rank in the top 98% by market cap. The resulting portfolio is rather broad with over 6000 companies putting a limit on concentration risk.
The importance of index construction
In the name of honesty, I’ll admit that my lecture attendance rate at university was not something you’d put on a resume. In those days, the phrase ‘index construction’ couldn’t have woken me from the dead. And yet here I am, years later, writing about it voluntarily. Miracles happen.
Conventional wisdom suggests that EMs are defined by geography or economic development. In investing, however, they’re defined by our benevolent overlords - the index providers. Each one uses its own criteria to decide the countries that qualify as ‘emerging’, to guide their index construction process. And of course, in the spirit of making life difficult for everyone, the big trio FTSE, MSCI and S&P, all take different approaches. These differences flow directly into the composition and performance of the ETFs that track them.
Index construction shapes everything from country weights and sector exposure to currency risk. Two emerging‑markets ETFs can look almost identical yet behave entirely differently because their underlying indices classify countries in different ways. It’s one of the more overlooked aspects of investing in EMs, and it can have meaningful consequences for what you’re actually trying to achieve.
Small quirk, big implications
Shifting away from the theoretical, a perfect example is South Korea – the land of shopping centre music and world-class semiconductors.
MSCI classifies South Korea as an EM, while both FTSE and S&P classify it as developed. Because VGE tracks a FTSE index, South Korea is excluded from the equation entirely. Meanwhile, the average fund within this category allocates roughly 10% to South Korea.
This means investors in VGE don’t get exposure to major South Korean companies like Samsung, SK Hynix or Hyundai, all of which have been significant contributors to regional equity performance in recent years.
This classification nuance has impacted VGE’s relative performance at various points. Over certain periods, VGE has lagged peers that include South Korea, not because of cost or manager skill, but simply because those peers hold large Korean technology names that have driven strong returns.
Data as of July 13, 2026.
Data as of July 13, 2026.
Importantly, this doesn’t imply a ‘good’ or ‘bad’ judgement on VGE as a fund or FTSE’s methodology. It’s simply an example of how the ETF and corresponding index you choose represent an active decision embedded within a passive product.
How strong is the case for emerging markets?
We think the future of emerging market equities rests on four drivers: a turning US dollar cycle, a recovering earnings trajectory, historically wide valuation discounts versus the US, and structural leadership in the AI hardware economy.
Whether VGE is the best way to access emerging markets ultimately depends on what you want your exposure to look like. Our analysts describe Vanguard’s FTSE Emerging Markets Shares ETF VGE, as faithful representation at a rock-bottom cost of 0.48% p.a. compared to the category average of 0.99% p.a.
VGE reflects FTSE’s definition of emerging markets, which excludes South Korea and results in heavier weightings toward China, Taiwan and India. Investors who object to the exclusion of South Korea may find that another fund more closely aligns with their objectives.
My main point is that no ETF is identical, even when they are targeting the same part of the market. The choice of ETF is less about chasing winning exposure like the performance of South Korea, and more about understanding how the index behind the label ultimately affects your outcomes.
