Multi-Factor Investing in Emerging Markets
More attractive than in developed markets?
March 2026. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- Factor investing produced higher returns in EM than in developed markets
- Factor premia were large even over the most recent decade
- However, long-only products were unable to harvest these premia effectively
INTRODUCTION
The largest multi-factor ETF in the U.S. is Goldman Sachs’ ActiveBeta U.S. Large Cap Equity ETF (GSLC). It selects stocks based on four well-known factors: value, momentum, low volatility, and quality. The construction is largely textbook, fees are very low at 0.09% per annum, and the sponsor is widely regarded as having top-tier talent and a strong technology platform. Yet, since its launch in September 2015, GSLC has underperformed the S&P 500 by roughly 0.85% per year.
Unfortunately, similar underperformance has been observed across most U.S. multi-factor ETFs over the past decade. One explanation is that the U.S. equity market has become overcrowded, with smart-beta strategies now representing approximately $1 trillion in assets under management.
What about multi-factor investing in less crowded places like emerging markets? Let’s explore.
FACTOR INVESTING IN EMERGING VS DEVELOPED MARKETS
We compare the excess returns of the established long–short equity factors from the Fama–French framework across developed and emerging markets. Between 1992 and 2025, we find that excess returns were higher in emerging markets than in developed markets for all factors except profitability. An equal-weighted multi-factor portfolio would have generated an annualized excess return of 4.6% in emerging markets, compared with only 2.8% in developed markets.
It is worth noting that these results exclude transaction costs and include stocks with very small market capitalizations. That said, the magnitude of the excess returns suggests they would likely remain positive even after accounting for realistic trading costs.
