Emerging Market Funds: Same, Same, but Different?

Divergent factor exposures

May 2023. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Emerging markets offer divergent factor exposures across and within regions
  • Smart beta ETFs do not necessarily offer high factor exposures
  • It is all about fund selection


We highlighted previously that the case for exposure to emerging markets (“EM”) stocks is not as clear as frequently highlighted by the marketing materials of asset managers (read The Case Against EM Equities). Sure, perhaps some of these markets have higher economic growth rates than Europe or the US, but there are also multiple concerns.

The MSCI Emerging Market Index notes at the same level as in 2007, despite all the growth of emerging economies over the last 16 years. The index’s largest constituent country with a 32% weight is China, where lately the political regime has been anything but investor friendly. Worse, the medium to long-term outlook for its economy is not particularly rosy given record levels of debt, and a population that is expected to shrink by 400 million people until 2100.

We could further emphasize the high correlation of emerging market stocks and US high-yield bonds, which implies limited diversification benefits, or that EM stocks mostly outperform when the USD is becoming cheaper, and therefore represent a currency bet, but this would be just nit-picking.

Let’s assume an investor still wants exposure to EM equities, should he go for mutual funds or ETFs? Buy a global emerging markets index or multiple country indices? Select a smart beta or plain-vanilla product?

Although these asset allocation questions can be quite challenging, we will attempt to answer some of these using factor exposure analysis in this article.


We define our universe of possible investment opportunities as emerging market mutual funds and ETFs that have at least five years of track record and are available to US investors, which results in approximately 240 funds that manage almost $400 billion of assets. These can be differentiated by geographies, which includes global, regions, and countries, and by invest