FEATURED

EM Is Beating the S&P 500. Nobody Seems to Care.

For roughly 15 years, betting on emerging markets over U.S. equities was a reliable way to underperform. That pattern may be breaking in a meaningful way, and the flows say so more clearly than any analyst note.

Year-to-date in 2026, investors have added more than $35 billion to EM equity ETFs, already surpassing the full-year totals from several recent years. International equities accounted for roughly half of all equity ETF inflows in early 2026, compared to just 20% the year prior. That is not a rounding error. That is a meaningful shift in how institutional capital is being allocated.

The numbers behind the shift are not complicated. EM equities currently trade at approximately 13x forward earnings, a roughly 40% discount to developed markets, wider than the long-term average discount of around 32%. At the same time, EM earnings growth came in at approximately 16% in 2025. For 2026, analysts have revised EM earnings growth estimates higher, with the consensus now running around 33% according to State Street’s March 2026 data. That compares to roughly 12% for U.S. equities on earlier forecasts, though more recent estimates have been revised upward as Q1 results surprised to the upside.

What’s interesting is that most of the institutional rotation quietly began months ago, while U.S. investors were still debating whether the Fed would cut or hike. The MSCI Emerging Markets Index posted a 30.6% return in 2025, outperforming all three major U.S. averages. Through early 2026, it was off to its best start versus the S&P 500 in three decades, outpacing domestic stocks by 14.4% through February before the Iran conflict introduced a temporary headwind. By mid-May, the iShares MSCI Emerging Markets ETF was up roughly 23% year-to-date, compared to just over 9% for SPY over the same period.

The leadership within EM is specific and worth understanding.

Korea and Taiwan are the East Asian tech angle: semiconductor exports, AI hardware, and corporate governance reforms. Taiwan Semiconductor sits at the center of every conversation about where AI chips actually come from. South Korea was the standout country performer in 2025 by a wide margin. The MSCI Korea Index returned over 100% in USD terms for the full year, driven by a combination of a weaker dollar, AI hardware demand, and corporate governance reforms that drew renewed foreign interest. India has compounded at roughly 13% annually over the past 15 years in USD terms, driven by domestic consumption, infrastructure spending, and a burgeoning IPO market. Brazil is the emerging contrarian call. Cheap on a CAPE basis, with a political environment that is drawing fresh attention from global allocators looking beyond Asia for diversification.

The dollar is the other piece of this. EM assets historically suffer when the U.S. dollar strengthens, because most commodity contracts and EM debt are dollar-denominated. But the macro backdrop has shifted. A weaker dollar trend, moderating U.S. rate expectations, and improving EM sovereign balance sheets create a materially different environment from the one that crushed EM in the 2013 taper tantrum or the 2018 dollar surge. BlackRock’s survey of EMEA clients in early March found that EM stocks were among the top two asset classes clients planned to add to over the following three months, alongside European equities. The drivers cited: diversification away from U.S. concentration, supportive EM macro fundamentals, and a weaker dollar.

Here is the part the headlines miss. Despite improving flows, EM remains structurally under-owned relative to global benchmarks. Institutional positioning is only now beginning to catch up to what the fundamentals have been pointing to for over a year. The reallocation that creates durable performance is not a week or a quarter. It is a multi-year rotation of the type that defined EM outperformance from 2003 to 2007.

The accessible vehicles are straightforward. The iShares Core MSCI Emerging Markets ETF (IEMG) carries approximately $134 billion in assets, tight spreads, and broad exposure across China, India, Taiwan, and South Korea, holding over 2,700 securities. Single-country ETFs for Korea and Brazil have seen strong demand in 2026. For investors willing to go more specific, Taiwan Semiconductor and Samsung Electronics represent direct plays on the AI semiconductor cycle with a fraction of the U.S.-comparable valuation.

The risk is not theoretical. Geopolitical friction around Taiwan remains a live variable. China’s weighting in the MSCI EM index means sentiment around Beijing’s economy and regulatory posture matters significantly. And any meaningful reversal in the dollar’s current direction would put pressure on EM currency returns.

But here is where I land on this: the consensus in 2026 is still U.S. equities first, everything else second. The data is starting to argue the opposite. When a rotation this large is happening and most retail portfolios still have near-zero non-U.S. exposure, that asymmetry tends to close in one direction.