Should Emerging Market ETFs Play a Bigger Role in Your Portfolio?

With the “AI scare” trade showing little signs of fading, volatility in the world’s largest economy has dampened investor appetite for U.S. assets. According to LSEG Lipper data, as quoted on a Reuters article published last week, U.S. investors are exiting the domestic stock market at a 16-year high, given fading Big Tech returns and improving opportunities overseas.

As per the abovementioned article, roughly $75 billion has flowed out of U.S. equity products over the past six months, including $52 billion since the start of this year, the largest early-year outflow since at least 2010, highlighting a growing push among U.S. investors to diversify away from domestic assets.

Since Feb. 25, the CBOE Volatility Index has climbed about 12% and is up roughly 35% so far this year, underscoring the heightened volatility and uncertainty that markets have faced in 2026.

Emerging Markets Pull Ahead as Investors Follow Performance

Emerging-market equities have attracted around $26 billion in inflows from U.S. investors so far this year, according to LSEG Lipper data, as quoted on the abovementioned Reuters article.

The Dow Jones Emerging Markets Index has gained 27.36% over the past year, comfortably outperforming the S&P 500 Index, which has risen 16% over the same period. Emerging markets have also started the year on a stronger footing, advancing about 8.29% year to date versus the S&P 500’s 0.93% increase. Together, these trends highlight growing investor momentum toward emerging market economies and a rising allocation to the asset class.

According to another Reuters article, Bank of America’s global fund manager survey revealed a sharp February rotation out of U.S. stocks and into emerging markets, with EM exposure at a five-year high, with emerging markets becoming investors’ biggest overweight position across all asset classes.

Why Global Equity ETFs Deserve a Bigger Portfolio Role

Concerns over AI-driven disruption unsettled markets in February, emerging as a dominant source of volatility and prompting investors to scale back exposure to U.S. technology stocks. Given the S&P 500 Index’s heavy concentration in the tech sector, demand for U.S. equity funds subsequently eased.

That said, reducing exposure to technology is not the sole reason investors should diversify. Broader structural risks, including elevated U.S. national debt levels, uncertainty around the Trump administration’s tariff policies and an increasingly complex geopolitical landscape, reinforce the case for spreading risk across sectors, asset classes and regions.

Additionally, a weakening greenback further fuels interest in global equity funds. As capital flows rotate away from U.S. assets, demand for the greenback softens, putting downward pressure on the currency. According to TradingView, the U.S. Dollar Index (DXY) has fallen 0.52% so far this year and 8.26% over the past year. The index recorded an all-time decline of 18.48%.

UBS downgraded its stance on U.S. equities to neutral, warning that the market could underperform as economic momentum shifts to other regions, as quoted on a Reuters article. Per UBS strategists, the relatively low sensitivity of U.S. corporate earnings to global growth, elevated valuations, a growing trend of fund flows diversifying away from the United States and a weakening greenback are the reasons for the downgrade.

ETFs to Consider

Diversification remains one of the most effective strategies for building resilient portfolios, particularly in a market increasingly driven by a handful of dominant players. Reducing concentration risk through ETFs not only enhances portfolio balance but also offers added benefits such as tax efficiency and a simpler, more disciplined approach to investing.

Emerging market ETFs offer an efficient route to broader geographic diversification. While they introduce higher risk, a measured increase in exposure can improve portfolio diversification and enhance long-term return potential, potentially boosting risk-adjusted returns.

Below, we have highlighted some funds that investors can use to gain 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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