Tap Broader Global Diversification With Emerging Market ETFs

It’s only halfway through January 2026, and the U.S. market is already contending with uncertainty over Fed independence and questions around proposed credit card caps. At the same time, U.S. military actions in Syria and Venezuela and Trump’s renewed focus on acquiring Greenland, even through military means, have added to the fragile and complex geopolitical landscape, fueling market volatility.

While fears of an AI-driven market bubble have eased somewhat from last year, they continue to linger in the background. Combined with the risk of AI-driven inflation, these risks are adding to volatility in the U.S. market, dampening investor appetite for domestic assets and weighing on the world’s largest economy, prompting redirection of capital away from the United States.

U.S. equity funds experienced significant outflows in the week ending Jan. 7, reflecting growing investor caution. As per Reuters, according to LSEG Lipper data, investors pulled a net $26 billion from U.S. equity funds during the first week of the year.

Rising Investor Focus on Emerging Markets

The Dow Jones Emerging Markets Index has gained 30.72% over the past year, outperforming the S&P 500 Index, which has gained 18.55% during the same period. The emerging market index has gained around 4.23% in January so far, compared with the S&P 500’s 1.18% increase. Together, these trends underscore growing investor momentum toward emerging market economies and rising portfolio allocations to the space.

According to LSEG Lipper data, as quoted on another Reuters article, emerging market funds attracted robust investor interest, with $3.16 billion flowing into emerging market equity funds, the largest inflow in six weeks, in the week ending Jan. 7.

Expectations of Lower Rates Make Emerging Markets More Attractive

Expectations of further Fed rate cuts in 2026 also add to the appeal of emerging market funds. A weakening greenback further fuels interest in global equity funds. The value of the greenback is closely related to the Fed’s monetary policies. Its value tends to move inversely with the Fed's interest rate adjustments. Interest rate cuts by the Fed make the dollar less attractive to foreign investors, as these weaken it.

Credit Card Cap and Trump–Powell Tensions

According to a Reuters article, Jamie Dimon and other top JPMorgan executives have cautioned that Trump’s proposed credit card interest rate cap could seriously harm consumers and the economy, with the industry warning that millions of households could lose access to credit.

Additionally, Trump’s repeated public attacks on Fed Chair Jerome Powell have likely amplified investor concerns. According to JPMorgan Chase JPM CEO Jamie Dimon, as quoted on CNBC, undermining central bank independence could backfire, raising inflation expectations and putting upward pressure on interest rates over time.

ETFs to Explore

Adding emerging market equity ETFs can broaden geographic exposure while enhancing overall portfolio diversification. Those willing to take on a modest increase in risk may further tilt toward emerging market ETFs to unlock higher return potential. Below, we have highlighted some funds that investors can use to gain targeted exposure to emerging market economies.

Investors can consider iShares Core MSCI Emerging Markets ETF IEMG, Vanguard FTSE Emerging Markets ETF VWO, iShares MSCI Emerging Markets ETF EEM, SPDR Portfolio Emerging Markets ETF SPEM and Avantis Emerging Markets Equity ETF AVEM.

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This article originally published on Zacks Investment Research (zacks.com).

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