Investors are warming to emerging market stocks - here’s how to add them to your ISA

Key points

• Investors are showing increased appetite for emerging market equities

• Diversification benefits and long-term growth potential need to be weighed with risks from currency exposures to tariffs

• Consider an active vs a passive approach based on risk appetite

Investors are showing increased interest for emerging market equities as they seek diversification amid concerns about high valuations in the US.

According to Bank of America, a net 37% of fund managers are overweight EM stocks, the highest since February 2023. Almost half (49%) believe EM stocks are undervalued, while 91% think the US is overvalued.

A turnaround in expectations for China’s growth and a weaker dollar are tailwinds for emerging markets. The dollar is down about 10% this year and fund managers polled by the bank expect further declines. A weaker USD supports emerging markets via lower borrowing costs and allowing their central banks to cut rates. A lot of EM nations have dollar-denominated debt, which becomes easier to service when the USD weakens.

The MSCI EM Index is up about 16% in dollar terms this year, ahead of both Wall Street and MSCI’s index of developed world stocks. 

Growing economic activity across Africa, Asia, Latin America and Europe is spurring a rethink of the EM space relative to developed markets, and the performance is showing. Among the top-performing ISA-eligible ETFs in July the Xtrackers MSCI Thailand UCITS ETF and the Amundi MSCI China Tech UCITS ETF in the top three.

Passive UCITS ETFs – Broad Emerging Markets Exposure

These ETFs track major benchmarks like MSCI EM or FTSE Emerging Markets. Ongoing charges figure (OCF), sometimes referred to as total expense ratio (TER), usually sit around 0.14%-0.20%. 

With about £20bn assets under management, the largest ETF in the space is the iShares Core MSCI EM IMI UCITS USD (Acc) ETF (EMIM), which tracks the MSCI Emerging Markets Investable Market Index (IMI).  Its major holdings of Taiwan Semiconductor Manufacturing Company, Alibaba, Tencent, Samsung and HDFC Bank show a weighting towards Asia.

A popular option is the iShares MSCI Emerging Markets UCITS ETF (IEMA), which reflects the return of the MSCI Emerging Markets Index.

It’s about 10% weighted to Taiwan Semiconductor Manufacturing Company, reflecting this company’s ascent following the rapid rise of its foundry business manufacturing chips for AI. The ETF also has a heavy skew to China via holdings of Tencent, Alibaba and the iShares MSCI China A UCITS ETF (CNYA). Another is the M&G Global Emerging Markets ETF, with holdings of TSMC and Prosus.

Providing access to a different benchmark but employing much the same approach - and holdings - is the Vanguard FTSE Emerging Markets UCITS ETF (VDEM).