AI & “Ex-China” Rewriting the Emerging Markets ETF Playbook

For starters, a look at the best performing emerging markets ETFs — and the ones attracting a lot of the assets — offer direct access to one of the market’s biggest investment themes: artificial intelligence. While AI has been a driving force in U.S. equity market performance and portfolio allocation decisions, investors have been keenly aware of the global opportunity in this theme. More specifically, the opportunity in the physical infrastructure of AI such as advanced memory chips, high-bandwidth storage, and capacity, all of which runs directly through EM hubs.

From a geographical perspective, South Korea and Taiwan loom large as key exposure areas of interest.

AI Theme Key Driver of EM ETF Performance

When we look at the best performing EM ETFs so far this year, we see that they share an outsized allocation to these tech-heavy countries, which have been riding the global AI boom. They also exclude China equities, which have benefited from the AI story, but remain pressured by real estate weakness and labor market issues, among other things.

In its latest market outlook, Citi characterized China as a “K-shaped economy,” noting that weakness in key sectors continues to drag down the country’s equity markets.

“AI-related manufacturing continues to accelerate,” Citi said. “The benefits of this boom, however, aren’t spreading evenly across the broader economy. Consumer confidence remains subdued, having stayed negative for more than four years.

“Households continue to save heavily,” the firm continued. “Property markets tell a similar story. Conditions have improved in some Tier-1 cities, particularly those benefiting from AI-related business activity, but the broader national market remains weak.”

Their outlook? More of the same for now.

“From a market perspective, the K-shaped economy remains evident,” Citi concluded. “Equities tied to AI and the new economy should continue benefiting from concentrated nominal growth, while rates are likely to remain anchored by weaker old-economy dynamics.”

Ex-China EM ETFs Shining Brightest

These market conditions have fueled an ex-China EM ETF investing trend to great results this year. The iShares MSCI Emerging Markets ex China ETF (EMXC), for example, is leading performance charts with returns of about 34% year to date.

EMXC filters out China, and has top weightings heavily concentrated in global chip powerhouses Taiwan and South Korea at 28% and 22% allocations, respectively. The fund is now among the largest EM ETFs, with $24.6 billion in total assets. The Columbia EM Core ex-China ETF (XCEM), a cheaper alternative to EMXC with an expense ratio of just 0.16%, has seen similar performance results by riding the same playbook.

Ex-China is working well for EM ETF investors this year. Consider that the iShares Core MSCI Emerging Markets ETF (IEMG), where Taiwan and South Korea lead, but where China snags about 18% of the portfolio, results have been strong — outpacing the S&P 500 almost 2x — but notably less so. IEMG is up about 18% year to date. The fund remains the single largest EM ETF with $154 billion in total assets.

It’s noteworthy that its closest competitor, the Vanguard Emerging Markets Stock Index Fund ETF (VWO), has delivered much different results this year due to its methodology. VWO excludes South Korea entirely because FTSE Russell, the index provider behind the fund’s benchmark, categorizes the country as a developed economy. That exclusion, and the heavier allocation to China at 27%, has VWO up only about 9% in 2026 — or half the gains seen in IEMG.

The Valuation Opportunity

Another key driver of emerging markets investor appetite is the valuation gap.

With the S&P 500 trading at premium multiples, investors have been increasingly looking for some margin of safety through diversification. That has put emerging markets centerstage as a compelling opportunity due to their combination of structural growth and lower relative valuations.

As an example measure, consider that the trailing P/E ratio for IEMG is currently 19.8 vs. 30.5 for the iShares S&P 500 ETF (IVV). Emerging market discounts relative to U.S. equities remain above 33% — a significant level considering that, historically, discounts usually sit somewhere between 20% and 30%.

The Avantis Emerging Markets Equity ETF (AVEM) specifically screens for emerging markets stocks that are trading at lower valuations and with higher profitability ratios. This actively managed strategy is up more than 20% this year even with 19% of the portfolio tied to China — its third largest geographical allocation. AVEM is now the fourth largest EM ETF with some $25 billion in assets under management.

Know What You Own

It goes without saying that dispersion in results is wide in a category where country exposure, single stock weightings, and broad strategy approaches vary significantly.

While some ex-China EM ETFs have delivered more than 30% in gains year-to-date, there are some EM strategies that are flat or even slightly negative this year. Knowing what you own is key, and product choice is directly tied to investment goals.

The good news is that EM ETFs abound in the market from many of the largest asset managers, including firms like State Street, Schwab, Dimensional, WisdomTree, Goldman Sachs, Pictet, Baron Capital and more. (For a list of EM ETFs, check out our ETFdb EM ETF Category List).

Looking Ahead

Looking ahead into the second half of the year, many asset managers expect more of the same in this opportunity set: AI growth dominance, China challenges, and broad valuation appeal. Emerging markets equities should remain a compelling diversifier and growth engine.

That said, it’s interesting to be aware of some wrinkles.

First, there seems to be a shifting narrative around EM and the Federal Reserve. For a long time, the consensus view was that emerging markets required aggressive Fed rate cuts in order to thrive. But mid-2026 results are challenging that assumption.

When we read midyear macro outlooks from firms like Goldman Sachs and J.P. Morgan, we see that expectations are for a Fed that will remain on hold for the remainder of the year. Markets, however, are currently 50/50 on a possible rate hike by the end of the year — odds that have increased towards a hike in recent months.

A higher-for-longer interest rate environment is traditionally a headwind for emerging markets by strengthening the U.S. dollar. Yes, that dynamic has been somewhat challenged in 2026 by the fact that emerging markets aren’t always debt-laden economies, and many are now heavyweight tech hubs seeing strong earnings tied to global AI infrastructure spending. That’s a longer-term supportive trend, but something to watch as U.S. monetary policy comes into sharper focus.

Another interesting wrinkle is seasonality. Historically, emerging markets equities can be highly cyclical throughout the calendar year. Long-term historical data from the MSCI Emerging Markets Index shows that late summer and early autumn tend to be seasonally weak stretches for emerging markets. That weakness can trigger some reassessment of global risk and slowdown asset gathering.

The story for emerging markets in 2026 has been, indeed, fun to watch, and it could be that first half results expand into second half gains. Diversification into this category has worked well, but it never hurts to remember that emerging markets rarely move in perfect straight lines, and bracing for any potential short-term turbulence is just good investment practice.

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Originally posted on ETF Trends

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