What is an emerging market?

Whether you are new to investing, or an experienced investor, you’ve likely heard the term emerging markets used to describe a geographic area of investment. The term was coined by Antione van Agtmael, who in 1981 originally described emerging markets as an economy that is “not too rich, not too poor, and not too closed to foreign capital.”¹ He believed the name evoked “progress, uplift and dynamism.” However, this definition lacks a clear standard for inclusion into the category. Today, a concrete definition of emerging markets still remains elusive but is generally accepted to be countries that have large cap companies, high levels of economic development and GDP growth, as well as the ability for foreign investors to participate. 

The role of emerging markets in your portfolio

Diversification: Investing in emerging markets provides a way to diversify beyond US and Canadian markets, which often have a high weighting to technology and Canadian financials. Investing in emerging markets allows investments to be spread geographically, in different currencies, and in a greater number of industries.

Capturing global growth: Emerging markets are often sought for their higher growth potential over developed markets. These markets often see faster GDP growth as they move towards economic formalization, benefit from a young and growing workforce, and experience a large rise in consumer and government spending.

Investment considerations

Emerging markets often exhibit common market features and risks that help distinguish them from other types of economies.

Features: Emerging markets often are more heavily weighted towards industrial and manufacturing sectors, while developed markets are more service oriented. Financials often make up a large percentage of emerging markets as those are investable businesses for foreign investors. The banking and financials sector in emerging markets grows as the economy grows, and as an increasing segment of the population seeks traditional banking services.

Geopolitical risk: Emerging markets often trade at a discount to developed markets because of the perception of higher levels of geopolitical risk.² This makes these markets more attractive to investors who are willing to take on volatility and higher risk for the potential of higher returns. Part of this risk stems from the structure of emerging markets—which often contain a greater proportion of state-owned entities and have lower levels of central bank independence.³

Liquidity risk & currency risk: Liquidity risk and currency risks are also two concerns for investors in emerging markets. Liquidity risk occurs when the price of a security slips because it is difficult to sell (or buy), which occurs more frequently in markets with a shallower pool of investors. Currency risk is borne by investors who may purchase a product or security which trades in Canadian dollars, but the underlying assets held by the fund are in foreign currency. Should the foreign currency depreciate against the Canadian dollar, the value of the holding is reduced. Some ETFs and funds hedge against this risk. 

Structure

Emerging market indices are constructed and maintained by the major index providers: MSCI, FTSE and S&P. These three market-cap weighted indices track global markets including those in Asia, Latin America, the Middle East, Africa, and emerging economies and Europe. One significant difference in the indices is whether they include South Korea as a constituent country. 

MSCI Emerging Markets Index is the most well-known index. It tracks around 1,200 constituent companies in emerging markets, focusing on both large-cap and mid-cap firms. Because of this, it is heavily weighted to IT and financials.

FTSE Emerging Index tracks around 5,000 constituent companies and also includes small-cap as well as large-cap firms. Without any investments in Korea, the index has a high weighting to exposure in India.

S&P EM Index is the broadest of the emerging markets indices, tracking over 7,000 companies including small-, mid- and large-cap across all sectors.

Emerging markets had strong performance in 2025, with the peer group returning 30.50% over the calendar year. Additionally, fund flows into the asset class rose 8.7% with $3.21b in inflows from ETFs and $1.45b inflows from mutual funds.⁷

Investing in emerging markets

The most common way for retail investors to invest into emerging markets is through mutual funds and ETFs, which cater to different investment styles. Passive strategies seek to replicate the performance of a major index, while active management strategies look to select specific securities which they believe are expected to outperform the broader market. All of these investment strategies come with the aforementioned risks, which may not align with your investment objective or risk tolerance.

Emerging markets are increasingly a part of an investor’s portfolio. Strong performance in 2025 and increasing fund flows signal an increased appetite for these products amongst investors.

Conclusion 

While the North American-centric strategy has historically been the anchor of a Canadian investor’s portfolio, the global landscape is shifting. Emerging markets represent the frontier of high-growth investing. However, this potential for higher returns comes with a more complex combination of geopolitical risks and uncertainty. Whether you are looking for active management or passive solutions, emerging markets have become a key component of a modern global portfolio. Reach out to your advisor to discuss if this is right for you.