"MSCI World vs. MSCI Emerging Markets: Three ways to outperform – and a grandmother's magazine"

1. Broad market access: ETFs and broadly diversified funds

If you want to add emerging markets to your portfolio in a minimalist way, market-wide solutions are the best option. Classic ETFs on the MSCI Emerging Markets provide simple and solid access. If you want a slightly broader market coverage, add an ETF on the MSCI EM IMI to your portfolio. The abbreviation IMI stands for “Investable Market Index” and brings a higher proportion of small caps into play. The MSCI EM IMI contains around 2,000 stocks, but the focus is identical to that of the MSCI EM: China, Taiwan, India, and South Korea together account for a good three-quarters of the index weighting. In terms of sectors, the old commodity cliché is a thing of the past; information technology is the largest block with just under 25 percent, followed by financials, cyclical consumption, communication services, and industry, while commodities play only a minor role with around seven percent. For many investors, this is the natural entry point: easy tradability, low costs, and full participation in the index performance. Those who want to go a step further will find broadly diversified active funds with more or less low tracking errors. Quantitative approaches in particular – such as those from Robeco – address index weaknesses and also ensure risk-adjusted outperformance in the long term. However, this requires investors to have access to low-cost strategies. Above all, it is important to choose funds with low ongoing costs.

2. Beyond the MSCI Emerging Markets Index

The real growth stories in emerging markets often take place outside the standard indices. Many fast-growing digital and tech companies—such as Kaspi with its super app in Kazakhstan, Nubank as a Brazilian fintech, Sea with gaming, e-commerce, and fintech in Southeast Asia and Latin America, Nebius as a cloud and AI infrastructure provider, or robotaxi pioneer Pony AI—are either completely absent from the major EM indices or only represented in trace amounts. Actively managed EM funds can include such stocks and thus participate in structural trends such as digitalization, AI, fintech, and new mobility, which are only partially reflected in benchmarks. This approach appeals to return-oriented investors who consciously accept more growth and more individual stock risk. However, history also shows that periods of spectacular outperformance are often followed by equally spectacular corrections – 2022 was a case in point – which is why such strategies belong more in the satellite component of a portfolio than in its core. This also applies to frontier markets, i.e., second-tier stocks that are not included in the MSCI Emerging Markets Index. For small caps and frontier markets, it is advisable to rely on proven actively managed funds. However, bargain hunters will have to swallow the bitter pill that most of these funds incur annual costs of two to four percent. However, robust approaches are still capable of creating added value for investors.

3. Low-risk EM equities: low-volatility and defensive strategies

At the other end of the spectrum are strategies that deliberately play emerging markets in a more cautious manner. Defensive strategies focus on robust business models, favorable valuations, stable sectors, or minimum volatility strategies that significantly reduce fluctuations and drawdowns compared to traditional market portfolios. They are aimed at investors who want to participate in the long-term growth of emerging markets but have limited tolerance for the typical swings. The downside is that such strategies often lag behind dynamic growth funds and the broader market during strong bull markets. In return, investors gain a smoother return curve, which can be psychologically valuable: many investors exit at the wrong time – i.e., at the low point – when losses are high.

4. Emerging market bonds: security, interest rates, currency leverage

If you consider the risks associated with equities in emerging markets to be too high, bonds offer an alternative that can still be very lucrative. This is particularly true of government bonds denominated in local currencies, which are often less risky than investors assume. Did you know that emerging markets are often less indebted than industrialized countries? Yet they still offer higher interest rates than bonds issued by countries in Europe and the United States. Emerging market bonds are currently in a sweet spot. Many central banks in emerging markets raised their key interest rates early in 2020, responding in good time to rising inflation. Government bonds denominated in local currencies therefore offer attractive coupons. At the same time, there is the prospect that US interest rates will fall this year. This makes classic carry trades more interesting again: investors not only collect the interest rate differential, but ideally also benefit from currency gains. For euro investors, EM local currency bonds offer a sensible complement to euro bonds – provided they accept higher volatility. Political risks, institutional weaknesses, and isolated currency crises remain real dangers, but they are no longer the “privilege” of emerging markets: the fiscal integrity of the US is also increasingly being called into question. The collapse of the dollar in 2025 provided eloquent testimony to this.

By Ali Masarwah, 12 January 2026, © envestor.de