Emerging market (EM) funds are experiencing an exciting revival in 2026, driven by valuations that were once overlooked and now demand attention. After years of relative underperformance, investors are taking a fresh look at economies poised to outgrow developed markets by a substantial margin.

With a blend of cyclical support and long-term structural catalysts, this is just the start of what could be a multi-year renaissance. Here’s why the timing could hardly be better, and how you can position your portfolio to capture the upside.

Why 2026 Marks a Turning Point

The period from 2025 into 2026 saw EM equities deliver some of their strongest returns in recent memory. After underperforming for much of the previous decade, they outpaced U.S. and European benchmarks, signaling a shift in investor sentiment.

Several macro drivers underpin this momentum:

• EM GDP growth of 4% vs. 1.5% for advanced economies in 2026
• Weaker U.S. dollar boosting returns and narrowing risk premiums
• Anticipated Fed rate cuts leading to lower global interest rates
• Record inflows ($15.4B into EM funds) in January 2026, largely into passive vehicles

Valuations and Ownership Dynamics

Emerging market equities trade at a significant discount relative to historical norms and developed market peers. A forward price-to-earnings multiple of 14x for 2026 earnings hints at ample multiple expansion potential if growth surprises continue.

Ownership remains light: broad EM ETFs hover at under 5% allocation in many global asset portfolios, and active managers have increased EM weightings by only a few percentage points. This under-ownership and historical discount creates room for further appreciation as flows normalize.

Fund Performance and Flows

Strong momentum in early 2026 reinforced the narrative that EMs are decoupling from their cyclical ties. A leading EM ETF posted a 45% one-year return, while overall category inflows hit record highs.

• GEM ETF up 45.36% over 12 months, fastest among peers
• EM earnings growth ~14% vs. S&P 500’s 6% projected for 2026
• $31.5B into international equity and $15.4B into diversified EM in January 2026 alone

Thematic and Structural Tailwinds

Beyond cyclical factors, emerging markets benefit from transformative, long-lasting trends:

AI Supercycle: South Korea and Taiwan drive chip manufacturing, while India ramps up data centers to support cloud growth.

Sustainable Infrastructure: India is adding over 15GW of renewables annually, and blue bonds finance coastal resilience.

Digital Inclusion: Mobile money usage climbs 10% per year, expanding financial access in Africa and Southeast Asia.

Risks and Considerations

No investment is without risk. Geopolitical tensions—such as trade tariffs and regional conflicts—can trigger market volatility. Concentration in broad ETFs is also a factor: for example, one popular EM ETF allocates 45% to China and Taiwan, and a South Korea ETF holds nearly half its weight in just two companies.

Investors must look under the hood at country and sector exposures, monitor policy shifts, and set realistic return expectations when constructing an EM allocation.

Strategies for Investors

How should investors approach this opportunity? A balanced approach can blend broad and targeted exposures:

• Broad Passive Exposure: Low-cost ETFs like Vanguard FTSE EM (0.07% OCF) or Fidelity Index EM (0.20% OCF) for core positions.
• Active Managers: Artemis SmartGARP (96.7% 5-year return) and JPMorgan EM Growth & Income for quality growth and income focus.
• Complementary Tilts: Infrastructure-focused funds such as Utilico EM, frontier allocations via BlackRock Frontiers, or region-specific ETFs in India and South Korea.

Active strategies can capture idiosyncratic upside, while passive vehicles ensure broad participation in the EM recovery. A typical allocation might allocate 60% to broad exposures and 40% to targeted themes and regions.

Conclusion

Emerging market funds are no longer the cyclical, commodity-driven plays of the past. They have evolved into resilient engines of global growth, supported by diversification beyond commodities, policy improvements, and a rare alignment of macro and secular tailwinds.

With valuations still attractive, ownership levels low, and capital continuing to flow, 2026 could mark the beginning of a multi-year outperformance cycle. For investors seeking to unlock the full potential of global markets, revisiting emerging market funds may well prove to be a transformative decision.