Emerging Markets ETFs: How to Choose an ETF for Emerging Market Equities
An emerging markets ETF is an exchange-traded fund that tracks an index of shares from developing economies such as China, India, Taiwan, South Korea or Brazil, giving investors broad, low-cost exposure to emerging market equities in a single trade. Choosing between emerging markets ETFs comes down to a handful of factors: which index the fund follows, what it costs, how it replicates the index, where it is domiciled and how concentrated it is. This guide explains each of these factors, how MSCI and FTSE define emerging markets differently, and where passive ETFs reach their limits.
What Is an Emerging Markets ETF?
An emerging markets ETF holds a basket of listed companies from countries that index providers classify as emerging, and aims to replicate the performance of a benchmark index rather than beat it. Units trade on a stock exchange like a share, so investors can buy and sell them throughout the trading day.
The most widely followed benchmark is the MSCI Emerging Markets Index. According to MSCI, it captures large and mid cap companies across emerging market countries and covers approximately 85% of the free float-adjusted market capitalisation in each country. Broader exposure to emerging economies — including actively managed funds — is discussed in our overview of emerging markets funds.
MSCI vs FTSE: Not Every Emerging Markets ETF Holds the Same Countries
Two emerging markets ETFs can hold noticeably different portfolios because index providers do not agree on which countries are "emerging". The best-known difference is South Korea: it is part of the MSCI Emerging Markets Index, while FTSE Russell classifies it as a developed market, as explained by justETF. A fund tracking an FTSE emerging index therefore has no Korean exposure, and the weights of the remaining countries are correspondingly higher.
Classifications also change over time. FTSE Russell is reclassifying Vietnam from Frontier to Secondary Emerging status from 21 September 2026, phased in over four tranches until September 2027, according to the FTSE Russell FAQ on the Vietnam reclassification. ETFs tracking FTSE emerging indices will gradually add Vietnamese shares, while Vietnam is not part of the MSCI Emerging Markets Index. Ways to access Vietnam specifically are compared in our article on Vietnam ETFs.
How to Choose an Emerging Markets ETF
There is no single best emerging markets ETF for every investor. The right choice depends on which exposure you want and how you plan to hold it. The following criteria help compare funds objectively.
1. The index
Decide first which market you want to own. Common variants include standard large and mid cap indices, "IMI" indices that add small caps, ex-China indices that exclude Chinese shares, regional indices such as emerging Asia, and ESG or factor versions. The index determines the country, sector and company mix far more than the choice of provider.
2. Total cost: TER and tracking difference
The total expense ratio (TER) shows the annual running costs, but the more complete measure is the tracking difference — the gap between the ETF's actual return and its index return over a year. Trading costs, withholding taxes, securities lending income and replication method all influence it.
3. Replication method
Physically replicating ETFs buy the shares in the index, either all of them (full replication) or a representative sample (optimised sampling), which is common in emerging markets with many small and less liquid stocks. Synthetic ETFs deliver the index return through a swap with a counterparty, which adds counterparty risk but can be efficient in markets that are hard to access.
4. Fund size and liquidity
Larger funds tend to have narrower bid-ask spreads and a lower risk of being closed. The liquidity of an ETF depends mainly on the liquidity of its underlying shares, not only on how often the ETF itself trades.
5. Domicile, tax and distribution policy
For European investors, emerging markets ETFs are usually UCITS funds domiciled in Ireland or Luxembourg. Domicile affects how dividend withholding taxes are treated inside the fund. Investors also choose between accumulating share classes, which reinvest dividends, and distributing share classes, which pay them out.
6. Currency and concentration
The trading currency of an ETF (for example USD, EUR or CHF) does not change the underlying currency exposure, which remains the mix of emerging market currencies unless the fund is currency-hedged. Investors should also check concentration: a few large markets and a small number of large technology companies typically account for a substantial share of a broad emerging markets index.
What Are the Risks of Emerging Markets ETFs?
Emerging markets ETFs carry the general risks of equity investing plus several specific to developing economies:
- Volatility and drawdowns — emerging market equities can fall sharply in periods of global risk aversion.
- Currency risk — returns for a European investor depend on emerging market currencies against the euro or Swiss franc.
- Political and regulatory risk — capital controls, sanctions or sudden regulatory changes can affect individual markets.
- Concentration risk — a broad index can still be dominated by a few countries, sectors or companies.
- Governance risk — standards of corporate governance and minority shareholder protection vary widely between markets.
ETF or Active Fund in Emerging Markets?
An ETF buys the index as it is, including companies with weak governance, state-owned enterprises and markets that are temporarily expensive. Active managers can avoid these, focus on specific countries or reach markets that broad indices do not yet include, such as frontier and newly upgraded markets. The trade-off is higher cost and the risk that the manager underperforms the index.
The limits of passive investing are discussed in our article on ETF investing and the role of active management, and the case for regional allocation in emerging Asia funds. For markets beyond the main indices, see our guide to frontier markets funds.
AQUIS Capital, a Zurich-based asset management boutique licensed by the Swiss Financial Market Supervisory Authority (FINMA), takes an active approach to one of these markets. The Lumen Vietnam Fund in the AQUIS Capital fund range is an actively managed equity UCITS fund investing in listed companies in Vietnam, selecting undervalued and high-growth companies with good corporate governance.
Frequently Asked Questions About Emerging Markets ETFs
What is an emerging markets ETF?
An emerging markets ETF is an exchange-traded fund that tracks an index of companies from developing economies, such as the MSCI Emerging Markets Index. It offers diversified exposure to many countries in a single, exchange-traded investment.
What is the best emerging markets ETF?
There is no single best emerging markets ETF. The most suitable fund depends on the index you want to track, total cost including tracking difference, replication method, fund size, domicile and whether you prefer accumulating or distributing units.
What is the difference between MSCI and FTSE emerging markets ETFs?
The main difference is country coverage. MSCI includes South Korea in its emerging markets index, while FTSE Russell classifies South Korea as developed. FTSE is also adding Vietnam to its emerging indices from September 2026.
Are emerging markets ETFs risky?
Emerging markets ETFs are generally more volatile than developed market equity funds. They are exposed to currency, political, governance and concentration risks, so they are usually held as one part of a diversified portfolio.
Does an emerging markets ETF include Vietnam?
Most broad emerging markets ETFs do not yet include Vietnam. Vietnam is not part of the MSCI Emerging Markets Index, but FTSE Russell is adding it to its emerging indices in tranches from 21 September 2026 until September 2027.
Read more about AQUIS Capital and the team behind it, explore the AQUIS Capital fund range, or contact the team with your questions.
This content is for general information only and is not financial, investment, tax or legal advice. Investments carry risk, including the possible loss of capital. Past performance is not a reliable indicator of future results. Consult a licensed professional before making decisions.
